Some Thoughts on Facebook’s Ads, Stock Price, And Instagram

The other day, I tweeted: “I think I figured out why FB mobile ads are working — they solve a big problem: Mobile app discovery, targeting, conversion, and tracking.” I was surprised to see the positive engagement around the tweet. Working for a company that’s iOS-first (and having worked for one previously), I’ve seen just how painful mobile app distribution for non-gaming, non-camera, and non-messaging or non-network products can be. Nailing mobile app distribution is like finding a needle in a haystack. That pain is compounded by the fact that the shift to mobile from web raises the bar for startups to achieve in order to meet the traction requirements most institutional investors are looking for regarding consumer-facing products.

The curious thing about Facebook mobile ads products, and especially their mobile app install SDK, is that their ads sort of help solve this problem. Imagine that — an ad that isn’t intrusive but rather helpful. There is an analog logic to this. Oftentimes with friends, I’m sure you ask each other about what apps you’re using and trade phones to see how people organize their apps. And, when I ask people to share their home screens for their iPhones on Twitter, I receive close to hundreds of replies. People want to know. They want recommendations from trusted sources. Now, Apple knows this information, but they don’t care to surface it. This creates an opportunity for Facebook to exploit the fact that startups and mid-range companies desperately need to increase their mobile footprints as well as the individual consumer desire to know what apps to use in an App Store world that is poorly designed and generally unnavigable.

That’s the opportunity Facebook is exploiting with their ads. People want good mobile apps. Companies, big and small, need a bigger mobile presence and the App Store makes it harder. On top of this, Facebook has enough graph data to know what handsets people are using (to route the right apps to potential users) as well as all the standard inputs like location, likes, and so on. This makes for an ad product which is, by all accounts of folks working in mobile right now, that’s leaps and bounds ahead of the rest of the mobile ad networks and gives Facebook a huge revenue boost, as evidenced by their recent earnings and subsequent share price increases over the past month.

Looking beyond this is where it gets interesting for Facebook, which is trading with a P/E of 192. The success of Facebook mobile ads is partly due to the fact that consumers are addicted to newsfeeds for information. (Hat tip to Adam Rifkin for this insight.) A bit off topic for this post, but this bodes very well for other “feeds” such as Twitter (I’m starting to see more and more experimentation with Twitter ads, down to the user level, which is exciting), Flipboard, and even Quora. LinkedIn, in particular, could do what Facebook is doing for consumer apps and apply to business-facing apps, potentially. This may explain why Facebook announced it’s building a new news reader app (Reader, it’s called, I think?) and was so rattled by SnapChat’s rise.

The addictive nature of newsfeeds means that (1) Facebook can continue to exploit this gap between mobile app makers and consumers, and (2) hold an ace up their sleeve with Instagram, which has one of the most engaged newsfeeds on mobile, period. If Facebook can tune their current model and find the right fit for Instagram (despite their introduction of video), it could mean Facebook could almost double-down on their revenue streams and, assuming The Street continues to reward them with high multiples (by contrast, LinkedIn’s P/E is close to 700), Facebook could continue its march from $50B a month ago to close to $100B today and very well could be on its way to a $200B+ market cap if and when it decides to leverage Instagram. I am obviously not a equity research analyst, so I don’t want to make stock recommendations here, but at least thematically on these vectors, Facebook appears to be well-positioned. There are many devils in these details, and I don’t mean to assert that Facebook can just turn it on, but Instagram is a special property and arguably a better native mobile experience.