How Facebook Makes Money: New Platform an Advertiser’s Dream

How Facebook Makes Money

Facebook’s Rocky Start (Before Its Revenue Platform Made Headway)

Starting with just 20 or so initial profiles scattered around Harvard in 2004, Facebook, Inc. (NASDAQ/FB) has since morphed into the world’s most important marketing platform, now with 1.3 billion active users.

Every day, disciples of Facebook log into their profiles and browse, comment, like, post, and share. Those daily interactions are a marketer’s dream. Find out what’s trending and popular, and target your advertising to a captive audience. It seemed simple enough.

And that was why investors clamored to get their hands on the company’s stock when it held its initial public offering (IPO) back in May 2012. Advertising dollars would pour in and early investors would reap the rewards.

Sadly, it didn’t start out that way. The fiasco started with Facebook shares losing half their value in less than six months. When it held its IPO, Facebook had a trailing 12-month price-to-earnings (P/E) ratio of 107. To put that into context, investors tend to be attracted to proven companies with a trailing P/E of 12 and they sell at 15 to 20 to even 30 times its earnings.

Had Facebook opened trading at a more reasonable price, investors might not have seen their portfolios get decimated. But that’s the stock market. It does behoove investors to do a little research. Hype only supports a stock for as long as it deserves it.

Advertising Creates Facebook Renaissance

Since bottoming in late 2012, Facebook’s share price has experienced a justifiable renaissance. The stock really started to trend higher in July 2013, when its revenue platform started to make solid headway.

The company announced it surpassed one million active advertisers on Facebook. This helped the company’s second-quarter revenue increase 53% year-over-year to $1.81 billion. More specifically, advertising revenue, which represented 88% of the company’s total revenue, was up 61% at $1.60 billion.(1)

Since then, strong advertising revenue growth has seen Facebook’s share price climb more than 185% to around $76.00 per share. In 2012, Facebook announced that revenue from advertising, which represented 84% of total revenue, was up 36% year-over-year at $4.27 billion.(2)

In 2013, revenue jumped 55% year-over-year to $7.87 billion. Advertising revenue was up 63% at $6.98 billion. Full-year net income came in at $1.50 billion.(3) And in 2014, Facebook announced that full-year revenue totaled $12.47 billion, a year-over-year increase of 58%; advertising revenue was $11.5 billion, a 65% increase from the previous year; and full-year net income was up 96% year-over-year at $2.94 billion.(4)

Atlas: Facebook’s Relaunched Platform a Game Changer

Since 2012, Facebook’s advertising revenue has increased 170%. Going forward, Facebook has made strategic steps to make its captive audience even more valuable to advertisers.

On September 29, 2014, Facebook relaunched its new and improved Atlas platform, and it has far-reaching implications for targeted advertising. The new platform gives advertisers the ability to track ads across the entire Internet, not just Facebook sites.(5)

It also does a whole lot more, especially when it comes to mobile devices. Cookies, used to keep track of your movements within a site, don’t work on mobile devices, which is how the majority of us now access the Internet. As a result, the targeted information that brands gleam from cookies has become less reliable. Atlas, in essence, provides advertisers with a window on the previously invisible on-the-go mobile users.

Make no mistake; Facebook isn’t the altruistic behemoth you might think it is. The company gets the majority of its ad revenue from mobile users. In the fourth quarter of 2014, mobile advertising revenue accounted for 69% of all ad revenue. That was up from 53% in the fourth quarter of 2013, and 23% in the fourth quarter of 2012.

No matter where you go online or how you get there, Facebook is passing the information onto advertisers. Users might find the idea a little creepy, but advertisers and long-term investors, not so much.