Facebook Inc's Most Valuable User Segment Grew 33% in 6 Months

By Markets Fool.com

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Facebook released a mobile ads manager app. Source: Facebook.

Small businesses have become the lifeblood of Facebook . The social network boasts that over 30 million small businesses have a presence on Facebook. Now, 2 million of those businesses actively advertise on Facebook. That's a 33% increase from management's last update at the end of its second quarter.

That amount of growth is noteworthy because Facebook is undergoing changes that reduce its ad impressions -- a shift to mobile and a change to its right-hand column ads. The rise in competition for fewer ad impressions has led to significant increases in ad prices.

It's also worth noting that 2 million advertisers is more than half of Google's advertiser base. It's also almost 2 million more advertisers than Twitter , which told analysts it had 60,000 active advertisers during its analyst day in November.

Can Facebook catch up to Google?
Google has been stuck around 4 million active advertisers since 2011. Since then, Google has purged a few hundred thousand "bad" advertisers that used deceptive practices and were harmful to Google's product. Still, growth has slowed significantly since the late 2000s.

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That presents the question for Facebook of whether 4 million is something of a limit, or if its model has the potential to move past Google.

Recent changes in Facebook's ad platform spurred an acceleration in active advertiser growth. COO Sheryl Sandberg credits the change in messaging from, "Do you want to become a Facebook advertiser?" to "Do you want to promote this post?" as a key driver to more businesses using Facebook's ad products.

Google doesn't have that advantage. Its ad products are somewhat more complicated to use, and even harder for business owners to discover and learn about. Simply put, Google doesn't have the same on-ramp as Facebook. It's more like a staircase.

For that reason, I think Facebook has the potential to attract more advertisers than Google.

A second avenue for growth
It's worth noting, however, that Google generates more revenue per advertiser than Facebook. That's because Google has the advantage of targeting its ads based on expressed interests in real time, i.e., search keywords. Facebook's targeting is based on its users' interests and past behavior, which is much less exact.

Still, more active advertisers will only work to improve ad relevancy on Facebook and its properties. More importantly, a large number of advertisers is key to making its global audience network that extends Facebook ads to third parties more profitable. (Game of War app install ads don't get more effective the 10th time you see them.)

More relevant ads are naturally more effective. And effective ads (combined with competition for ad inventory) are more expensive. As a result, Facebook also has strong potential to increase its average revenue per advertiser as the total number of advertisers grows.

Don't count out Twitter
As mentioned, Twitter has just 60,000 active advertisers, according to its last update. That number is undoubtedly growing as the company just ramped up its efforts to attract small businesses and is rapidly testing how it positions its pitch to potential advertisers.

Twitter's platform doesn't have as many users as its competitors, but it too is making efforts to expand its reach. The company purchased mobile ad network MoPub in 2013 and is syndicating its regular Twitter ads with partners that use its content. More importantly, Twitter's ads are often more effective than Facebook's in return on investment.

Twitter's increased efforts to attract small businesses -- instead of the large brands it previously focused on -- could stymie Facebook's growth. Considering, however, that Facebook seems to be growing active advertisers just fine over the last six months, Twitter still has room for improvement in its messaging and onboarding process.

Exceeding expectations
Analysts currently expect Facebook to grow revenue 37% in 2015. Considering the company already has 33% more advertisers than it did at the halfway point of last year, there's a lot of potential for Facebook to exceed those expectations. Assuming revenue per advertiser remains relatively stable (as it has over the last two years), Facebook could easily see 50% to 60% revenue growth in 2015 if it keeps up the pace in attracting new advertisers.

The upside could be limited by the decline in ad inventory as well as increased competition from Twitter to attract small businesses. Still, Facebook looks well set up to continue beating analysts' expectations in 2015.

The article Facebook Inc's Most Valuable User Segment Grew 33% in 6 Months originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.