Jul 152013

Why I Just Bought Facebook Stock

I generally don't buy individual stocks. I prefer the risk mitigation effects of index funds. However, I just bought a bit of stock in Facebook,* something I thought I'd never do. Here's why:

Performance Improvements of Ads

Google soared because the ads work for advertisers. The ads work for advertisers because they are useful to consumers. Google ads provide solutions to user's problems at the moment they express need. Facebook ads, by contrast, have been likened to advertising at a party. So what has changed?

A great deal. FBX allowed advertisers to target past visitors when they were on Facebook, greatly improving the targeting by incorporating recent interest data, more flexible creative, etc. FBX is not a new feature, and those ads, like the original ad format, also sat on the right rail and were largely visual noise to most FB users.

In late spring Facebook opened up the News Feeds for sponsored stories. These News Feed ads are a huge opportunity for advertisers.

Image stolen shamelessly from AdRoll

Studies show gigantic improvement in ad engagement, and advertisers who embrace this new medium by creating custom ads designed to be engaging in the moment and highly sharable find the effectiveness of the ads to be greater still. Advertising efficacy will drive advertising dollars and that will help close the gap between Facebook's market cap and their P & L statements.

Branding Investment

Facebook ads are display advertising, and display advertising spend has always been heavily skewed towards brand advertisers, not direct marketers. The direct response value of display has been difficult to scale for most of the big players in the ecommerce space. Display can be efficient. Display can be huge. Display for these folks cannot be both efficient and huge simultaneously.

There are always exceptions to these rules. I had a very interesting conversation with Terry Whalen of CPC Search a couple weeks back in which he was finding unbelievable scale and efficiency (significantly bigger than search) for some of his clients. These clients offered very unique products/services, which makes push advertising a far better vehicle than pull advertising. People don't search for what they don't know exists. However, these cases don't generalize to ecommerce more broadly construed. Shoe retailers, department stores, etc face a very different challenge in generating revenue at the scale of paid search through display advertising.

However, the presence of eyeballs, the extended time spent, the targeting ability and the more engaging format will attract brand advertising dollars in gobs. As I argued long ago, tracking is a double edged sword. Companies with a shopping cart on their website have a hard time justifying huge branding investment when the data indicating wasted spend is so compelling and the data indicating offline influence is so sketchy and hard to come by. The big brands in CPG, Automotive, etc often don't expect conversions online, and have never had the ability to connect advertising dollars to revenue. They have much greater comfort with "engagement" as a success metric, and FB could eventually be the beneficiary of TV-like advertising spends from these types of advertisers.

The above isn't news to the financial analysts and institutional buyers and I wouldn't place bets on the stock value based on that alone. I'm betting that they haven't yet grasped the potential impact of FB Conversion Tracking which also became available in 2013.

Facebook Conversion Tracking

Conversion tracking is already happening through ad buying platforms using FBX, but Facebook's own conversion tracking and performance reports will give FB an opportunity to paint their own picture of success with their ad platforms. We will soon see stories indicating a huge chunk of website conversions are influenced by Facebook ads and that will drive new investment.

Here is how it works: Facebook ad reports will show credit for successes (orders, downloads, leads, whatever) for FB ads clicked with 1, 7, and 28 days, or ads seen within 1, 7, or 28 days of the success event. This last piece is the magic.

Suppose you owned a clothing store in a very small town. The town has one and only one grocery store. You decide to buy an ad for your clothing store on the grocery store window. Were you to give credit to the grocery window ad for every person who saw that ad prior to buying from you, you'd find that that ad was the only thing between you and bankruptcy because every one of your customers saw the ad at some point before coming into your store.

Now suppose there was a website where virtually all of your customers spend a few hours every week, many spending time every day. Suppose you serve display ads to your best customers...your 'fans' if you will...and suppose the person who sold you the ads tells you: "Any time someone sees one of those ads and then buys from you, my ad gets the credit..." Lo and Behold! Those ads appear to be driving a huge chunk of your business. Makes a pretty compelling case for spending more money on those ads, no? Indeed, if a salesman convinced you to buy an ad everyday to everyone who visited that site....

No small business owner would be so naive as to give credit to the grocery store ad for every order place by someone who saw it; they'd give credit only for the incremental business it seemed to drive. But the web is a tangled place, and not everyone has the sensibilities of the local haberdasher.

To Facebook's credit, they report the view-through and click-through conversions in separate buckets, split out further based on the lag between the ad interaction and the conversion event. It is up to the advertiser to properly weight those conversion events.

But here's the thing: advertisers with ROI constraints are dying to spend money on Facebook, they just need ROI justification to do it. Agencies and media buying platforms are dying to convince advertisers to spend money on Facebook. Facebook conversion tracking will provide justification to those so inclined.

This could be the catalyst for unlocking marketing budgets to FB in ways that they haven't been to this point.


Facebook is gaining traction with advertisers through more cost effective ad formats. These formats genuinely work better for advertisers and money follows efficacy. Brand advertisers tend to be slower to adopt new advertising formats as budgets are fixed long in advance. As the Big Brands and their agencies learn to use the new FB sponsored stories wisely the purse strings to very large media budgets will work in Facebook's favor. Finally, the illusion of success created by 100% view-through credit attribution will give naive advertisers and ruthless salespeople the excuse to overspend.

The combination may be game-changing for Facebook.

*The author of this piece is not a professional investor, nor is he a licensed investment adviser. Indeed, he's a complete moron when it comes to investing having failed to buy GOOG when it was $85/share. Acting on this author's investment advice is akin to taking swimming lessons from someone who can't swim: ill conceived and downright dangerous.


13 Responses to "Why I Just Bought Facebook Stock"
Terry Whalen says:
Hi George, A very well-articulated post, elevated further by the use of the word haberdasher ;) We have continued to see the same trends in Facebook Ads that you and I spoke about in the recent past. FB Ads is making digital marketing more fun and exciting these days, and that in itself is a huge positive! --Terry
Eric says:
I'm surprised that Facebook hasn't tried click-to-call ad formats yet. Considering the vastness of mobile phone impressions/engagement on Facebook, it seems like the kind of thing that they would try, and give another measure of ad performance.
Thanks Terry! FB stock went up 1.4% within an hour of my post. I'm not saying I caused it, but...1.4% on a Market cap of $65B ~ $1 Billion. Think Zuck will share? Eric, that's a great point. Graph search seems so well suited to local search (wine bars in SF liked by sommeliers) that that kind of monetization effort is bound to follow.
Holy crap! And within a week it went up more than 20%! Good moves! I'm impressed. My dad bought the stock at $18/share. I am telling him to hold on. If they keep in the direction they are going it will be over $100/share in no time. The in-stream ads have killed it for many advertisers.
Thanks for sharing, Stuart. As I tweeted earlier today "even a blind squirrel finds a nut sometimes."
Jim Jansen says:
Will be interesting to see if this advertising increase is (1) a short term reaction to the change in how FB is doing advertising or (2) an advertising channel that FB users will react positively to in the long term. ... My initial take is that it is a short term reaction to the advertising change and FB users will adjust once they understand what happened (i.e., CTR will regress to the normal). ... Regardless, another great post!
Thanks Jim, I think advertisers will learn to generate truly engaging content that is worthy of people's time. The challenge will be to have that content not just be cute kitten videos that have no connection to your brand. I think the future of content marketing is bright, and that it is really in many ways retrogression back to the past. Mutual of Omaha's Wild Kingdom (okay so the content was essentially videos of BIG kittens, but...). Quality, engaging, cost-effective, brand-relevant content is hard to do, but done well it's powerful.
Al Lennon says:
As it transpired after your post, looks like you 'bet on the right horse'. Of course there are always ups and downs but buying just before a massive price increase and explaining why before it happens is more along oracle lines. You should be proud of your buy and your article written just before the horse bolted.
Thanks Al, but I can't claim to be an oracle. Wound pretty tightly into this industry, though. I have the advantage of getting to see how new features perform in the wild before earnings reports are released. I don't think that violates any SEC rules, but to be safe I only bought 1 share :-)
Al Lennon says:
ha- ok that probably won't earn your family a nice little beach vacation, might pay for a nice sandwich. I honestly had thought that folks who got into the IPO were betting on the wrong horse- certainly looked like that after it first floated. However it does now appear that Facebook are monetizing their potential just fine, a billion or so regular users will do that in the era we live in.
Hi George, We'd experienced the same results as you had on FB adverts and felt they had really started to nail it on mobile. We've also been buying tech stock we rate as, like you, we get a pretty early indicator on how things are going through our day jobs as a digital agency. We started this after my biz partner Luke suggested we buy Apple stock back in 2003 when we first began, and we didn't. Damn! When I read your blog post it tipped our thinking over into action and we bought in for a reasonable amount at $25 per share. So thanks! The other good stock we've held for a while now is TSLA which seems to be going very well and hopefully has quite a bit further to go. Thanks for sharing your thoughts. Mark
Darryl says:
Hello All.....question Do you think FB's stock price will increase in the same manner as GOOG or even faster ?. Like you George, I missed the opportunity to buy GOOG as well as a number of other stocks that has increased over the past few years. The dot com bubble , housing bubble and recession has been a very disturbing time for investing over the past few years. I'm looking to gain back on what I've lost and I'm hoping FB will be the one....I will also be waiting on the Twitter IPO..I look buy once it starts trading.
Mark, Darryl, thanks for your comments. I really don't pay much attention to stock prices, so can't speak to what is a good price in the short run relative to value in the short run. My thinking is along the lines: what companies provide users with a truly valuable experience, and advertisers a means to connect with users in a way that adds to instead of detracts from the user experience. I don't know whether Twitter meets that criteria. The two I would think seriously about if I was more of a gambler would be Linked-In and Pinterest (whenever it goes public). The commercial potential for Pinterest is staggering (wouldn't be surprised if Amazon bought Pinterest before it gets too big to eat.) Linked-in is already a tremendously valuable business and mechanism for B to B relationship building, networking, sales, and job hunting.

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