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Facebook Inc (FB), Google Inc (GOOG), And Will This Overtake TV?

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Online publishers like Facebook Inc (NASDAQ:FB) are fond of promoting mobile as the next big thing that will surpass television as an advertising medium, but is this realistic? It is important to remember that companies need to talk up expectations and sentiment to maintain a strong stock price. Mobile is growing with increasing smartphone penetration and faster wireless internet speeds. Still, television has a number of inherent advantages that make it very difficult to replace.

Facebook PhoneCredit: Facebook Inc (NASDAQ:FB)

What Do the Numbers Show?

An Edison study from 2012 found that smartphone users use the internet around 3 hours and 24 minutes per day and they watch television for 3 hours and 20 minutes per day. According to the same survey, around 46% of smartphone users browse the internet several times per day on their smartphone. These figures show that while smartphone users may spend more time on the internet than viewing television, smartphones only account for a portion of internet use. On a viewing time per day basis, television still comes out above smartphones.

Tablets are a growing part of the mobile ecosystem. A recent study found that tablet users spend an average of one and a half hours per day browsing with their tablets. Tablets’ use peaks around eight to 11 o’clock at night; the same as prime time television.

Taking smartphone and tablet use together, mobile’s daily usage looks similar to television’s. Smartphone penetration in the U.S. is expected to continue growing and this will only swing the numbers in mobile’s favor. An important caveat is that many people multitask with mobile devices while watching television.

The Challenges

On a dollar basis, television is still America’s largest ad medium and this is not expected to change. It is not difficult to understand why. Consumers are used to being interrupted from their favorite show for a couple minutes to be shown ads. Imagine if people were browsing Facebook Inc (NASDAQ:FB) only to be interrupted by a 30-second popover. Users would be outraged and flee to competing social networks.

For mobile users, Facebook is forced to place just a few small ads in their content. This has allowed the company to grow its mobile revenue, but it offers nowhere near the exposure as a prime-time television commercial. Industry projections show that Facebook could grow net U.S. mobile revenues from $0.39 billion in 2012 to $1.86 billion in 2015; around 48% of Facebook Inc (NASDAQ:FB)’s expected U.S. digital display ad revenues in that year.

Where to Invest?

GOOG Total Return Price data by YCharts

Though Facebook Inc (NASDAQ:FB) is expected to enjoy fat revenue growth, its earnings won’t necessarily justify current valuations. With expected 2014 earnings per share (EPS) of $0.48 and a stock price above $24, it is trading at a forward price to earnings (P/E) ratio above 50. It is very expensive, considering its low earnings before interest and taxes (EBIT) margin of 10.7% and the fact that there are other strong competitors in the mobile space.

Google Inc (NASDAQ:GOOG)‘s ownership of YouTube is very important. Consumers are slowly becoming accustomed to pre-roll ads that play before some videos. Google is showing that it can compete with television as a medium and offer similar ads. Mobile video is growing and it already accounts for half of some network’s mobile traffic. Google Inc (NASDAQ:GOOG)’s strategic position in traditional online video easily transitions to mobile and paints a very positive picture of its future.

Google trades at much more reasonable multiples than Facebook Inc (NASDAQ:FB). With an expected 2014 EPS of $44.81 and a stock price around $820, it trades at a forward P/E ratio around 18. Its EBIT margin of 26.8% is more than twice Facebook’s. The company isn’t trading at sky-high multiples and by 2015 Google Inc (NASDAQ:GOOG) is expected to control the largest share of net U.S. mobile internet display ad revenues.

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