Facebook's Monetization Is Just Getting Started

Facebook  has seen a massive rally lately. Gone are the days when Facebook was trading in the mid-20s. The company's second-quarter earnings crushed estimates, and the rest is history. However, Facebook still has a number of key drivers in its arsenal that it can use to grow its revenue pie substantially from current levels. 

Mobile advertising
Driven by growth in its user base, Facebook's mobile fortunes are looking very rosy. Out of the company's 1.15 billion monthly users, a staggering 820 million of them are using mobile devices to access Facebook.

As a result, Facebook's mobile advertising revenue now makes up roughly 36% of the company's cumulative sales. Based on the company's second quarter mobile revenue of $656 million, Facebook is on pace for annualized mobile revenue of more than $2.6 billion. In fact, the company's management is already expecting mobile advertising revenue to surpass PCs in the near future. 

Facebook's user engagement is at all-time highs as well, measured by the number of users frequenting the company's platform every day, which rose to 61% of total users. With such an active and engaged audience, the company's mobile advertising prospects are excellent. 

The company has been rolling out more ads on its News Feed, which has seen big increases in both user engagement and click-through rates for ads. This strong performance of ads on mobile will encourage advertisers to allocate more dollars for mobile News Feed ads. 

Fueled by the company's explosive growth on mobile, Facebook's top-line revenue in the last quarter grew 53% year-over-year, which was its fastest quarterly growth rate in the last six quarters. Facebook's leading competitor for online advertising dollars, Google  is also doing very well with mobile-based advertising.

Google doesn't break down its mobile ad revenue, but the company disclosed last year that its mobile revenue run-rate was more than $8 billion per year. Google's management recently disclosed that the high-traffic video site, YouTube, now gets roughly 40% of its viewers on mobile. The rapid growth in online advertising will substantially benefit both of these companies in the future. 

Instagram has immense potential
Facebook-owned photo-sharing platform, Instagram, is growing at a rapid-fire pace and now boasts more than 150 million monthly users. However, Instagram hasn't reached high user penetration levels among smartphone users like Facebook has. With Instagram's total visitors being a mere fraction of Facebook's user base, it has much more head room for growth.

Instagram's introduction of video has almost certainly benefited in keeping consumers stimulated and engaged on its platform. Users upload and share millions of photos daily on Instagram, and the video product has also gained strong momentum. Facebook doesn't place ads on Instagram's photos and videos, but Mark Zuckerberg stated that his company is planning to grow the presence of Instagram a lot more before taking steps to monetize the Instagram audience.

A lot of similarities can be seen between Instagram and YouTube's strategies. When Google acquired YouTube in 2006, the user-generated video site didn't earn much revenue, but was instead focused on gaining users. Fast forward to 2013, and YouTube is generating an estimated $4 billion in annual revenue.

YouTube is very well-positioned to benefit from the growth in online video ad space. Instagram is likely following YouTube's playbook of first gaining a large user-base, and monetizing that large audience later.

Going forward
In spite of the Facebook's rally so far this year, the company still has a lot of upside in the long-term. There is a lot of room for growing its user base, especially in developing markets. Facebook's mobile footing is phenomenal and can significantly increase penetration. Most importantly, advertisers are increasingly using Facebook to reach their target customers. Clearly, Facebook's monetization engine is just taking off.

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The article Facebook's Monetization Is Just Getting Started originally appeared on Fool.com.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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