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Facebook Users Are Clicking More Ads

Adam Levy, The Motley Fool

Despite reports of declining time spent on Facebook (NASDAQ: FB), it looks like the social media company is making the most of the time its users still spend on the platform. Engagement metrics increased across the board in the first six months of the year, according to data from Facebook's own Audience Insights tool as reported by CNBC. The median number of comments, likes, and -- most importantly -- ad clicks increased substantially between January and July of this year.

That last metric is extremely important for Facebook, which derives practically all of its revenue from advertising. The company is no longer increasing its ad load (i.e., the number of ads users see in the feed), so increasing engagement with ads is the company's best path toward continued revenue growth.

The Facebook like symbol on a sign at the entrance to Facebook's campus.

Image source: Facebook.

Improving the feed

At the beginning of last year, Facebook made some major changes to its News Feed algorithm. The primary change is that users will see fewer posts from businesses and publications, as well as fewer viral videos. Instead, most users will see posts of photos and status updates from their friends.

Over the last year and a half, Facebook has continued to tweak the News Feed algorithm in order to maximize the quality of content in people's feeds. That includes the advertisements. As users see more and more relevant content -- from their friends and businesses alike -- engagement increases. That's especially true now that the company has lapped the major overhaul of News Feed at the start of the year.

Overall, the changes to Facebook's News Feed algorithm may make sponsored posts stand out more. Combined with an increasing supply of advertisements, improved targeting capabilities, and continued improvements in ad creatives, ad engagement is bound to increase.

Not only do higher click-through rates bode well for Facebook in the near term, it also provides a long-term boost, as advertisers ought to be willing to bid more for ads that convert better. So, more clicks now and higher-value clicks in the future should provide continued revenue growth for the social media company from its News Feed, even if overall time spent in feeds is moving in the wrong direction.

Don't forget about Stories

While Facebook is still improving its revenue per user in its feed, a significant piece of its revenue growth over the next few years will be its ability to improve advertisements in Stories. Engagement in Stories continues to grow rapidly, but the level of monetization is still in the early stages.

Despite 3 million active advertisers in Stories, Facebook has a lot of room for improvement in Stories that will increase the number of ad clicks in the format and the value of those clicks. Many of the ad placements in Stories are merely repurposed feed ads that Facebook automatically places in Stories. Merely attracting more Stories-specific ad creatives ought to boost the number of clicks for Facebook, which is something that will happen over time as Stories continue to grow in popularity.

Additionally, Facebook hasn't yet optimized ad load in Stories nor has it developed many ad formats specifically for Stories. Improvements in those areas should result in more clicks and more revenue for Facebook.

The increasing engagement in Facebook's News Feed, however, gives the company a lot of time to determine the best way to monetize Stories. Investors should expect Facebook to take its time figuring out Stories monetization in order to maintain engagement growth in the format while maximizing value long-term. Keep an eye on management's commentary around what's driving changes in ad engagements and price per ad during the calls following its earnings reports.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.