Let’s start by *facing* the music. The fact that Facebook is not worth $ 38 a share or about $ 104 Billion today, has been clearly decided by the market. But while Facebook might not be worth a 100 B , it is a Very ‘valuable’ company. The problem with most commentators is that they are confusing Facebook’s market cap with Facebook’s long-term ‘value’ ( financial and social ).
In fact, so much has been already written about it that, it’s impossible not to know all the related numbers. Suffice it to say that at roughly, $ 3.7 Billion revenues, $ 1.8 Billion pre-tax profits and a 40 cent earnings per share, the Facebook IPO was a Big *facepalm*. So what does the future hold for Facebook and indeed its shareholders?
Facebook Investor at IPO Price!
Facebook’s Current Valuation:
If you bought at the $ 38 levels, you are a Big believer in the world and word of Mark! The bad news is that you are going to be losing between 15 to 20% of that money over the next 6 – 12 months. I am not saying that FB might not touch, or go above $ 38 levels, briefly. But I believe that the trend will be between 28-33$ ( close to the original offering band) per share. Most experts, such as, Prof. Aswath Damodaran of Stern School of Business, NYU believe that the right price for FB is 29$. Read his take here: http://goo.gl/zzRw6 . But as with all believers, if you have faith , I believe you will end up making good money on your investments, in the next 2-3 years.
Of course, if you are one of the smart investors who had the good sense not be lured by the Wall Street Mafia on IPO day, don’t buy yet! It’s a good bet that Facebook will touch the $ 26- 28 level. Anything at $ 28 or below is a good price to buy.
Okay, now that we have the price point for the stock settled. Let’s get on with the business of understanding how the price will rise. The only way the Facebook stock price will go up is if the company starts earning more per share, or in other words increases its revenues.
To do this it has to a) increase the number of users and b) monetize existing and new users better.
Let’s explore the User Growth Projections :
Facebook currently has about 900 million users about the same as Google. Facebook still has a lot of head room for growth in the Indian and African market and might also be able to enter China ( thought that’s more doubtful). If it can make its mobile app more powerful and work on lower end phones, it can successfully penetrate the rural markets in India and Africa to increase the subscriber base by another 100-300 million or so in the next 3-5 years. That’s not a bad growth rate. The growth in India and Africa will be on the back of new Internet users coming online, as Internet and broadband penetration increases, through both cellphones and desktops.
Great Infographic showing Indian Internet User Breakdown - by We Are Social
Better Monetization :
Facebook makes about $ 4 Billion yearly, today. That’s a lot of money, especially coming from a company making just $ 150 M just 5 years back . But it’s not nearly enough to justify a $ 106 Billion valuation… especially since other companies valued similarly like Amazon make way more money ( about 11 times more than FB at $ 44 Billion for 2011) and have more established and tested business models. It’s not an exact science of course , investor perception of value matters as much as solid numbers (recall the havoc played on Apple stock a couple of months back). That is why a company like Google which has revenues less than Amazon’s at $ 38 Billion , is valued at about $ 200 Billion or twice Amazon’s market cap. Hence drawing direct comparisons only on the basis of revenue numbers will be a futile exercise.
Revenue Growth 7 years from launch for tech companies - Chart by Silicon Valley Insider
So what is this X factor about Facebook , that allows it to believe that it’s worth half what Google’s worth with 1/10th it’s revenues and a very nascent, untested and from all reports fragile business model ?
The Answer is : Social Data.
Facebook knows your friends and relatives, and their friends and relatives and so on. Knows what you ‘Like’ : what you like watching, what you like eating and where you like going. In short, because you ‘tell’ Facebook what you want and who you are, Facebook can in turn use this information to create ads that fit your tastes. In theory, these ads should work better because they are tailored for you.This should allow Facebook to monetize users’ data at a higher value than a company like Google, which doesn’t have access to this kind of information. Thereby it follows that since Facebook has as many users as Google , it should technically be making or will start making more money than Google, as the ads on its networks are more valuable to advertisers since they are custom-made for you.
But… it’s not that simple.Besides the fact that users are not crazy about ads on Facebook , there are serious concerns around privacy. Facebook is currently defending itself against a class action suit filed against it for $ 15 Billion. This is close to the $ 16 Billion amount it raised through the IPO, for breach of privacy.
If nagging user concerns about personal data and suitability of a social network to showcase ads weren’t bad enough. Apparently, Facebook hasn’t been able to convert all the intelligence it has about you into a meaningful ad delivery service. This has resulted in a number of major companies, including most recently General Motors, pulling ads from the Facebook network.
In addition, with the rise of mobile Internet use worldwide, Facebook now has over 500 million users accessing the site on their mobile devices. That is a very large number of users and more than half of the total Facebook user base! But Facebook hasn’t yet cracked the code on how to successfully deliver ads on the smaller screens of the mobile devices!
So overall it seems like the Facebook business model and in turn the stock price is on very shaky grounds!
Resurrection of Mark and Facebook :
So you must be asking yourself , how the hell is it a good idea to buy stock of a company that makes 1/10th what Google makes with more data and the same number of users!
But as I said earlier, it’s a matter of faith, in Mark Zuckerberg , as he still controls 57% of the voting shares and effectively the company!
So here’s what Mark Zuckerberg Could do to make more money :
- Facebook starts monetizing ads better on desktops by improving its backend AI for ad delivery – Facebook certainly has the engineering chops to do this. This one is also, fairly obvious.
- Facebook transforms into the default communication tool for most people ; from a cool social platform.Users come to accept ads as a part of the service a la Google.
- The same commoditization of Facebook results in users being willing to give Facebook their credit card details, thus kicking off F (FB!)- commerce.
- Facebook continues to do what it is doing already by becoming the default social identity platform for all the world’s users. Thus creating a massive incentive for developers to create apps using Facebook’s APIs and on its social networking platform ( as already happens), This way Facebook will turn itself into a massive Social App Store of the future, and rake in billions of dollars in revenues from the third-party developers in commissions like Apple. Facebook has already launched its version of the App Store in many markets.
- Facebook becomes a great place to market your apps and not just games. We already know that Facebook makes 17% of its revenues from Zynga, in the future, we are likely to see many such partnerships emerge.
- Facebook figures out a way to make money from its mobile user base. Think value added services – like prints of photographs taken from its mobile apps. Note : Facebook released its standalone camera app for iOS devices, yesterday, in select markets.
The Risks :
- Backlash from users against use of their personal data for advertising and other purposes. This is a Major area of concern for Facebook. Facebook is all about its users and if it’s users start leaving in droves the total value of the platform decreases, as it’s no longer THE platform where almost everyone can be found.
- Government regulations against use of personal data. Facebook has already settled with a couple of Federal bodies in an early marker of Governmental interest in user data and it’s uses. Worldwide as well, we see calls from different governments to regulate the use of Facebook by their citizenry.
- Most importantly though, Facebook and Mark Zuckerberg can’t afford to get complacent. Because something cooler and better Always comes along. Like a better Mobile Social Network , not Path :).
In the end, whether Facebook lives or dies and whether ultimately it’s a good stock to hold, will depend on Facebook’s ability to innovate. As much work as Mark Zuckerberg and his team have already done to reinvent our Internet experience, a lot more work is still required to turn that experience into a profitable and growing company. Only by achieving great scales in business and revenue will Facebook continue to have the kind of impact it has already had in creating a Social Web, not just on the Internet but in the Real World as well.
If Facebook can create a stable business model and get to annual revenues of $ 40 Billion in 8-10 years. Be Prepared for a Brave New Social World! Whether you want it or not…