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Facebook (FB) May Find Low-Tech Answer to Earnings Question, Higher Prices

January 8, 2013 10:13 AM EST Send to a Friend
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Analysts at Baird today released a positive report on Facebook (Nasdaq: FB), noting improvements in the social network's ability to leverage opportunities and improve monetization. Monetization has been a key concern among investors, but may ultimately prove to be an important selling point as the company makes progress with a number of key efforts including Exchange and with its controversial News Feed ads.

"Over the past 12 months, Facebook has shifted the source of its revenues from almost exclusively display ads on the right-hand side of the desktop website, to more engaging word of mouth' ads tucked within the Facebook News Feed," said analyst Colin Sebastian.

Almost immediately advertiser began to see improved ad performance, prompting many on Wall Street to take notice and revise estimates higher. But the new strategy is not without risk.

"Given the rapid increase in frequency of News Feed ads, such as Sponsored Stories, Offers and Sponsored Posts, we note there are risks around the user experience, and over-exposure to commercial postings," said Sebastian.

The risk of over-exposure limits Facebooks ability to capitalize on the new strategy. However, the performance of the ads may allow Facebook to increase revenue using an old fashioned but sound business approach, higher prices.

"We believe there is limited opportunity to increase frequency of ads, and growth in revenues will be driven by pricing – a natural result of improving ad performance," concluded the Baird analyst.

Baird has an Outperform rating on Facebook (NASDAQ: FB) with a price target of $34.00.

For an analyst ratings summary and ratings history on Facebook click here. For more ratings news on Facebook click here.

Shares of Facebook closed at $29.42 yesterday.




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