Small Screens, Fast Growth

Agenda-Setting Financial Insight.
Jan. 31 2013 12:59 PM

Facebook's Heavy Investment is Worth it

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Facebook deserves the benefit of the doubt about its rocketing costs.

Photo by Stephen Lam/Getty Images

Facebook deserves the benefit of the doubt about its rocketing costs. The social network’s bills jumped about 80 percent in the fourth quarter. That’s worrying - it’s twice as much as the top line grew. But all-important mobile advertising revenue doubled in 90 days. The potential profit justifies heavy investment.

The proliferation of small screens was the biggest threat facing Facebook. But there increasingly are signs that it is turning this into an even bigger opportunity. Advertisers had been reluctant to promote their wares or services on tablets and smartphones. And Facebook didn’t even bother trying to entice them until last spring.

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But increasingly slick mobile devices and better metrics for measuring the effectiveness of campaigns - and the fact that people now spend so much time on their devices - is attracting advertisers. Facebook, along with Google, appears to be one of the biggest benefactors.  Mobile accounted for 14 percent of advertising in the third quarter, but 23 percent in the three months to December. Throw in the fact that overall advertising, which accounts for most revenue, is growing, and mobile just about doubled.

But this didn’t come free. Operating profit was actually slightly lower. Facebook has boosted spending on R&D, increased headcount by 40 percent over the course of a year and increased capital expenditure by 45 percent. And the splurge isn’t over: the firm will increase investments in areas like search and spend more on IT infrastructure this year.

That’s a smart choice. Facebook now has more users on mobile devices than desktops and the number should grow quickly. Advertisers are growing more likely to target such users. And mobile ads still cost less than desktop ads, even though mobile users are probably worth more - reaching people locally is the holy grail of advertising.

Sure, with the stock priced at nearly 50 times estimated earnings, investors may be baking in too much future profit. But seizing the mobile opportunity is the best way for Facebook to justify its high valuation.

Read more at Reuters Breakingviews.

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