Stock in News: Facebook (NASDAQ FB) Ad Revenue Vulnerable

Some commentators have begun to worry that Facebook is overly reliant on revenue generated from selling ads to venture-backed tech startups that will go bust if the capital behind them dries up. If the theory came were proved correct, events would bear an uncanny resemblance to the bursting of the dot-com bubble, with Facebook Inc (NASDAQ FB) taking the role of Yahoo! Inc (NASDAQ YHOO).

However as Julien Codorniou, Facebook Inc (NASDAQ FB)’s platform director for Europe, the Middle East, and Africa explained to Business Insider, the system essentially roots out badly performing ads. The ads are funded by the revenue that they produce, and Codorniou claims that he does not know of any client that is wasting money on ads that don’t generate revenue.

In fact it could be argued that the mobile app install ads which are the cause of the controversy could even protect Facebook’s revenues. App creators buy Facebook ads to encourage people to download their product, and are obviously hoping to make more money through sales than what they spend on the ads, in a practice known as direct response advertising. If ads bring companies more business, they will continue to advertise. If not, they stop.

Facebook Inc: FB Ad Revenue

Facebook Inc (NASDAQ FB) COO Sheryl Sandberg recently attempted to explain this to investors, but it would appear that they didn’t fully understand. Analysts on the Street consistently underestimate Facebook’s revenues, partly because of a lack of understanding of recurring and additional ad business produced by direct response ad buys.

Another factor in Facebook’s favor is that the majority of its biggest advertisers are not venture-capital funded tech startups, but rather huge brand names such as Procter & Gamble,, Inc (NASDAQ AMZN), Wal-Mart Stores, Inc. (NYSE WMT), and Target Corporation (NYSE TGT). All of these big companies have apps that they want consumers to download.

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Facebook Inc (NASDAQ FB) Business News

In conclusion it would seem likely that Facebook Inc (NASDAQ FB) would see a decline in revenue should a recession hit, but that is because of a general trend towards a decrease in advertising budgets if the wider economy takes a downward turn, and not because of an over-reliance on tech start ups funded by venture capitalists.

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