One of the huge enablers of the internet induced tech bubble of the late 1990s was the promise of fabulous revenues from advertising dollars being diverted from traditional outlets to newfangled online properties like AOL.com, Yahoo.com, Lycos.com and Excite.com. These properties were known as PORTALS. Portals to the world wide web.
When the internet bubble burst in 2000, it became evident that eyeballs were not a sound metric to gauge banner ads sales, and the rest was history. Most portals lost 90% of their market value in the ensuing 2 years. Google was born from the ashes of the Web 1.0 bust, and now it seems like a two horse race for the most internet users in the developed world. For those looking for old contacts or staying in touch with existing relationships, social networks like Facebook are the initial access point in the more web app-centric world. Meanwhile, Google’s ease of use, the quality of Google search database, and its entrenched position means that it is a massive gateway to the web for most.
The promise of ad dollars being allocated across the web has arrived. As of the first quarter, total online ad revenue made a new all time high (per The Interactive Advertising Bureau and PWC) at $11.6 billion. I think it is safe to say that GOOGL captures a good chunk of that (they had $12.5 billion in total sales in Q1), while FB’s $2.5 billion in total sales likely participated in a healthy but distant second of that total pie. (Per the WSJ: Google reported second-quarter ad revenue of $14.36 billion. Facebook said it generated $2.68 billion in the same period.) You get the point – the pie is growing and while it used to be a monopoly, FB is nipping at GOOGL’s heels.
Yesterday, the Wall Street Journal reported that FB is testing a new Advertising Platform for marketers, stating that the:
new advertising platform designed to improve how marketers target and measure the advertisements they buy across the Web, according to people familiar with the company’s plans.
The product, called Atlas, is a re-engineered version of the Atlas Advertiser Suite business Facebook purchased from Microsoft Corp. in 2013. It promises to help marketers understand which Facebook users have seen, interacted with or acted upon ads that appear both on Facebook’s services and on third-party websites and apps.
It will also provide an automated ad-buying tool known in the industry as a “demand-side platform” or “bidder,” which will offer marketers the ability to buy ads that target Facebook’s members as they move around the Web.
So there are a few questions that arise from Facebook’s challenge on Google’s monopoly. Facebook has a $202 billion market capitalization, with expected sales of $12.25 billion in 2014 (much of it ads), growing at 56% YoY, and expected to grow 30% a year for many years to come.
The last time Google had a $200 billion market cap was 2012 and had $40 billion in sales (the large majority of it from ads). Since then, Google has hit a little bit of a speed-bump on the revenue growth front. Call it the law of large numbers but sales growth has dropped from 37% in 2012, to an expected 11% this year. Is this largely to due with Facebook’s emergence in online ads (they had only $5 billion in sales in 2012, getting only about $5 per user, growing to about $10 this year)?
So is Google, with double the market cap of Facebook and 4x the sales but slower sales and earnings growth, cheap to Facebook? Or is Facebook, at a much earlier phase of their growth, the better long-term investment given the growth opportunity and demonstrated ability to play ball on Google’s turf? The battle in the mobile advertising space is likely going to determine this battle’s winner. Of course, there are some other possible paths, such as a yet unknown competitor (a la Google 15 years ago) entering the fray, or even that the increased competition hurts both stocks. In any case, we’ll likely be talking about this duel for years to come.