Can Facebook Inc Deliver Above Analyst Expectations In 2014?

ITG reported Wednesday that Facebook's second quarter revenue is tracking $100 million above expectations. This comes amid reports that user engagement is down slightly , potentially implying that its video advertising business -- a space highly competitive with Google  and to some degree Twitter  -- is having success in its infancy. Video advertising could spark the next phase of growth and stock gains for Facebook.

The growing importance of video advertising
For the most part, any and all Internet-based companies have some advertising presence or create all of their revenue from advertising sales. Google, Facebook, and Twitter are among the biggest and fastest growing players, but following Google's success with YouTube, video advertising has become the new hot space to monetize.

The traditional T.V. advertising business is worth $200 billion , and as streaming videos become a larger segment, companies stand ready to capitalize. Currently, the streaming video advertising business is growing at a 30% annual clip, with Google dominating the majority of this segment.

Last year, Google's YouTube operations achieved $5.6 billion in revenue for 2013, or 51% growth year over year . YouTube's revenue is approaching 10% of the company's total sales -- Google had annual revenue of $59.8 billion last year  --  and if YouTube's growth continues to outpace overall revenue growth for Google, then video advertising will become a larger chunk of its total business. 

With that said, Facebook and Twitter are just now tapping into video advertising with less mature offerings. In regards to Twitter, it has slowly rolled out video-related tweets. Analysts estimate that Twitter will grow revenue 90% and 61% in 2014 and 2015, respectively  . Twitter creates the majority of its revenue via advertising, such as sponsored tweets and profiles, and Evercore Partners analyst, Ken Sena, estimates that 17% of the company's 2016 revenue will be created from video.  Consequently, much of Twitter's investment upside could lie in its ability to monetize video advertising.

A value driver now and later for Facebook
While Google remains the unquestioned leader, and Twitter is focused on becoming relevant, perhaps no company has more to gain than Facebook in this space due to both its enormous user-base and the engagement levels of those users. Facebook began rolling out video advertising earlier this year after reports initially surfaced in August of last year.  Given ITG's report that revenue is tracking above expectations, video advertising might already be playing a significant role for the company's fundamentals.

Reportedly, Facebook will (soon) run four video advertisements at 15-seconds in length for a 24-hour period, at a cost of $2 million per day . Already, Facebook has inked big deals like NBC and the $500 million agreement with Publicis in the initial months. Albeit, more deals are expected to occur, and it doesn't take an accountant to realize that the revenue from video advertising could become substantial.

If Facebook sells four ads every day of the year it could quickly become a $3 billion business , and that number could double, maybe even triple, if Facebook increases the price of ads or boosts the number of ads per day. Overall, this level of monetization simply shows how large Facebook can become by implementing different services.

By all measures, Facebook has the largest network of users on the planet, creating revenue very much like Google. At just 40% the market cap, Facebook looks like a golden long-term investment opportunity.

Final Thoughts
Facebook is coming off a year where it handily exceeded analyst expectations in each quarter. Therefore, it should come as no surprise that Facebook's revenue is tracking $100 million above its second quarter $2.8 billion consensus. 

This year, Facebook is expected to grow revenue 50 %, but due to the fact that its year-over-year growth has accelerated in each of the last four quarters, and video advertising has such high potential, this may be a conservative outlook. Regardless, Facebook looks poised to experience success much like YouTube. If so, expect Facebook shares, trading at 33 times forward earnings, to trade significantly higher and, like last year, leave analysts scratching their head once more over the next year.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (C shares), and Twitter. The Motley Fool owns shares of Facebook and Google (C shares). 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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