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Mark Zuckerberg, Cheryl Sandberg, and Facebook’s Management Updates Investors on Its Advertising Strategy

Facebook Management Updates Investors Advertising StrategyShares of Facebook (NASDAQ: FB) FB +1.31% have seen recent weakness largely attributable to ongoing concerns around slowing ad load increases and teen engagement.  Taking a look at what the company has in store for 2014 and beyond reveals that investors might benefit from buying shares following its recent decline from the 52 week highs of $54.83.

The facts on ads

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Facebook is putting an end to increases in the total number of ads.  The company indicated that for the time being it will not increase its ad load in an ongoing effort to optimize the end user experience, which is the logical action to take for the long term.  As advertiser demand and quality around Facebook ads continue to increase, this will enable a greater quantity of quality ads over time.

There are other growth levers that will continue to drive strong advertising increases for Facebook in the near term including users, advertiser demand, pricing, and click through rate (CTR.)

Marketer demand for Facebook ads continues to build, and higher quality ads will drive greater ad load over time.  Higher quality ads and better targeting capability should also yield a higher CTR, which is important given that the majority of Facebook ads are purchased on a click-through basis and the majority of Facebook ads are not currently clicked on.

The launch of auto-play video ads in 2014 can prove to be a game changer for the company.  The launch of these ads has been delayed several times as management wants to ensure the right user experience at launch.  These ads will be especially valuable with entertainment advertisers who have large budgets when it comes to promoting feature films or TV shows.

In terms of teen engagement, some of these users may be shifting to Instagram, which Facebook owns and is just starting monetize.  Instagram recently began showing ads from a small number of brand marketers such as Michael Kors (NASDAQ: KORS) KORS +0.20% and Macy’s (NYSE: M) M +3.12%.

Instagram ads will roll out slowly, and the model over time could feature a lower ad load but a higher CPM than what exists on Facebook.  Instagram’s social and visual medium will be attractive for advertisers.

When it comes to Instagram monetization, the most important fact to remember is that many analysts previously did not factor in Instagram advertising into their Facebook models and estimates.

Facebook continues to outperform competing services as a whole.  According to comScore, over the past year, Facebook’s share of total minutes across both desktop and smartphones grew from 13.1% to 15.7%.  During this same period, competing services grew their share from 1.7% to 2.4%.  While Facebook’s share declined 50 bps month over month and competing services held their share flat at 2.4%, Facebook’s U.S. minutes are still around 6.5 times greater than minutes spent on competing services.

Facebook will continue to evolve as it has done successfully in the past and will find ways to leverage its massive user base to deliver effective monetization strategies that will please advertisers, users, and perhaps most importantly, its shareholders.

About Jayson Derrick

Throughout his career Jayson Derrick has consulted and worked with several international hedge funds and most recently director of research for one of Canada's oldest trading desks. Jayson is a trader at heart but understands the importance of long term investing. Jayson best combines information and data that is used for short term trading and translates this in to long term, actionable investing ideas.

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Facebook, Inc. FB $58.94 $ 0.78 (+1.31%) As of 04/17/2014, 04:00pm
Michael Kors Hold KORS $89.93 $ 0.18 (+0.20%) As of 04/17/2014, 04:01pm
Macy's Inc Common M $56.83 $ 1.83 (+3.12%) As of 04/17/2014, 04:00pm