Google Is Helping Facebook Steal Ad Revenue From Yahoo And The New York Times

Facebook CEO Mark Zuckerberg

Google’s recent redesign of Gmail — which shunts “promotional” email into a special folder rather than letting it clutter your inbox — is working to Facebook’s advantage, according to UBS Investment Research analysts Eric J. Sheridan, Vishal J. Patel and Timothy E. Chiodo.

The UBS team believes that the Gmail change will reduce the effectiveness of email marketing — spam, to you and me — and that marketing budgets will thus transfer to Facebook, which allows brands to serve display ads to users targeted off their email addresses.

Coupled with Facebook’s new, yet-to-be-launched, video ad product, that could propel Facebook’s revenues to as much as $US9.14 billion in 2014, UBS said in a note to investors. 2013 revenue is expected to be ~$US6 billion.

The losers will be Yahoo, The New York Times and ValueClick, the UBS folks believe.

The first part of their extremely bullish case for Facebook is that despite the social network’s roaring business, it’s still nowhere near its potential ad-carrying capacity:

Based on our estimates, while Facebook currently generates more revenue per user than Yahoo or AOL, it is still significantly undermonetized vs. Google, its largest advertising peer. This differential is especially stark given traffic data showing users spend a comparable amount of time on Facebook as they do on Google’s sites. Specifically, our analysis shows that Facebook has ~4x headroom before it is monetizing its users at the same rate.

More specifically. UBS has confirmed in talks with ad agencies that clients are indeed willing to pay $US2.5 million for auto-play video ad placements on Facebook. “Some of our early checks have indicated that Facebook might be able to generate approx. $US2-4mm per day from video ad products (in North America alone) in 2014,” the UBS quants argue.

UBS then singled out three companies that appeared to be losing online ad business to FBX, Facebook’s ad exchange: Yahoo, ValueClick and the Times. UBS quotes executives as saying during the Q2 earnings season:

Yahoo: “Our display business has felt some negative impact, particularly due to the shifts around programmatic buying.”
ValueClick: “As it turned out, there was more weakness than we had anticipated, specifically in our U.S. display business … it was a fairly weak display market in Q2, and this was amplified for us due to client- specific budget changes mid quarter that resulted in significant spend falling out of Q2.”
NYT: “Digital display advertising continued to experience challenges in the quarter from programmatic buying issues along with pricing pressures caused by the glut of available ad inventory across the market.”

UBS’s upbeat take on FBX is surprising because Facebook COO Sheryl Sandberg went out of her way on Facebook’s Q2 earnings call to say that FBX was a much smaller business than everyone seemed to think it was.

Nonetheless, UBS has a price target $US45 for Facebook, with an upside to $US55.

That’s a staggering prediction: Although FB has had a good run recently — it’s up 124% from lows a year ago of around $US17 — it closed at just ~$US38 on Friday afternoon.

Disclosure: The author owns Facebook stock.

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