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Reportedly, Facebook Inc. (FB - Analyst Report) is working on a new mobile service known as Reader, which is designed to display news collected from users and publishers.

According to the Wall Street Journal, the service is primarily built on Apple’s (AAPL - Analyst Report) iOS mobile operating system and can run on both smartphones and tablets. However, it’s not clear when Facebook will launch this digital newspaper service or if it ever will.

The project reflects Facebook’s continuing search for ways to enhance customer engagement for its mobile apps. Growth in mobile customer engagement is critical for Facebook in order to generate higher revenues from mobile advertising, which accounted for 30.0% of revenues in the first quarter of 2013.

According to eMarketer, the U.S. digital video advertising market is expected to grow 41% in 2013 to $4.1 billion from $2.9 billion in 2012. Moreover, eMarketer predicts that the mobile video market is expected to double this year, touching $518 million.

At the end of the first quarter of 2013, Facebook’s monthly active users (MAUs) were 1.11 billion, while its mobile MAUs were 751 million, up 54.0% from the year-ago quarter. We believe that this massive user base presents a tremendous growth prospect for Facebook over the long term.

Facebook has launched several new advertising products (Lookalike Audiences, Managed Custom Audiences and Partner Categories) to boost its presence in the mobile advertising market. To boost customer engagement, it launched Twitter like hashtags (#), Facebook Home and most recently unveiled Instagram’s video application.

In such a scenario, the addition of a newspaper app will further boost Facebook’s penetration rate in the mobile advertising market going forward. Additionally, we believe that Facebook will gradually expand the service to Google’s Android operating system in the near future.

However, Facebook is expected to face significant competition from newspaper app providers such as Flipboard and LinkedIn (LNKD - Analyst Report), which acquired mobile news reader Pulse early this year.

Additionally, increasing investments related to infrastructure development may hurt Facebook’s near term profitability.

Nonetheless, the continued investments should improve the quality, engagement and value of its ads, which will further boost advertiser demand in 2013. Moreover, Facebook’s massive user base and its ability to track personal details over time make it a formidable force in the online ad market. Further, the company’s expansion in the mobile segment is noteworthy.

Currently, Facebook has a Zacks Rank #2 (Buy).

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