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Facebook (FB - Analyst Report) recently agreed to acquire San-Francisco based video advertising company, LiveRail for a sum ranging between $400.0 million and $500.0 million. However, the exact amount was not revealed.

Founded in 2007, LiveRail is a unique online video distribution and ad-platform. It allows companies and organizations to improve video ads targeting by automatically changing the price that they are willing to pay for a spot based on changes in audience data.

LiveRail’s major customers include Major League Baseball, A&E Networks, Gannett and Dailymotion. LiveRail claims to have hundreds of active customers and delivers more than 7 billion video ads on a monthly basis. Further, the company even considered launching its Initial Public Offering (IPO) sometime later in 2014.

In Apr 2014, at its F8 Conference, Facebook launched its long-awaited ad platform called Facebook Audience Network (FAN). Per sources, FAN and LiveRail would work together to bring accurately targeted video ads to all sorts of apps.

We believe that the addition of LiveRail will enable Facebook to offer better quality video ads around the web going forward. Moreover, LiveRail’s Checkpoint technology, which helps in ensuring that ads for tobacco, alcohol and other age-limited products are not shown to kids, will be an added benefit for Facebook.

It is believed that Facebook is following the footsteps of its rivals Google (GOOGL - Analyst Report) and AOL (AOL - Snapshot Report) who have been trying hard to ramp up their video ad businesses. AOL recently acquired video ad-exchange Adap.tv while Google launched a new video-only ad exchange in Jun, 2014.

Per EMarketer, the U.S. market for digital-advertising is set to grow 42.0% in 2014 to $5.96 billion. According to Gartner, ad market spending is expected to hit $42.0 billion in 2017. We believe that Facebook’s strategy of acquiring startups to target ads will beef up ad revenues going forward.

As Facebook’s ad business matures, top-line growth is expected to suffer. Facebook’s rapid pace of acquisitions is also expected to weigh down on profitability and cash balance in the near term. Intensifying competition from the likes of Google, Yahoo (YHOO - Analyst Report) and Twitter remains a major concern.

Nevertheless, we believe that Facebook’s growing mobile user base, Instagram’s increasing popularity, frequent launch of new products and international expansions will boost the company’s top line and profitability going forward.

Currently, Facebook has a Zacks Rank #3 (Hold).
 

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