80-1 P/E valuation seems a bit steep to me. I still see this as a $25 Billion company in the long term, which isn't bad for a site that gets much of its revenue from display ads.
You'll notice that just about every site in the top 15 sell goods and services (physical: Amazon, eBay or digital: Netflix, iTunes) or search ads (Yahoo, and Google). Display ad based sites languish at the bottom for several reasons, including the fact that the content of those ads are not what you came to the site to engage with.
If the numbers are right, then Facebook is bringing in about 1/3 the revenue of eBay, but analysts on secondary markets and elsewhere are giving it a valuation twice that of eBay's: http://finance.yahoo.com/q?s=EBAY or five times that of Yahoo's which has twice the revenue: http://finance.yahoo.com/q?s=YHOO
Hopefully people can see through the hyperbole, and find a fair market value for this company.
Value is more a function of future revenue, and margin, than it is of past revenue. So upward momentum, which Facebook has and Yahoo and EBay do not, explains the higher valuation.
Also, valuation comes from the expectation over all possible outcomes. Perhaps there's a 60% chance Facebook winds up just a $25B company. But there's also a 38% chance that it becomes a $200B Google and a 2% chance it becomes a one-of-a-kind $400B post-Google monopoly. The weighted average of those outcomes is $99B, even though your "$25 Billion company" sense remains the modal/most-likely outcome.
What kind of analysis is that? Valuations aren't based upon some arbitrary assignment of percentages to various outcomes. They're based upon hard numbers. I'm not a Facebook hater, I think their revenue will continue to grow, especially if they are able to successfully expand into new markets (hardware for example). But as for now, seeing as how they have really hit a saturation point in the US market in terms of user base to the point where usage is actually dropping, I have a hard time seeing them as anything close to a $100 billion company.
I would have a very hard time investing in any company whose sole source of income was based upon display ads, and was still trying to figure out a solid revenue model. You can say that they already have one, but if you compare the long-term viability of social ads to Microsoft for example, I think you would agree that the revenues that Microsoft generates are likely to be a lot more stable than those of Facebook. I think that social networks in general are still in their infancy, and anybody who tries to peg a valuation on any of them without some more data is acting rather foolishly. I'd be very curious to know what kind of numbers Twitter is generating.
It's important not to confuse hype with value. What generates the hype is not necessarily something that people are willing to pay for, and at the end of the day that's what determines a business' value.
My question is "Where is that revenue supposed to come from?". Let's assume Facebook's userbase doubles in the next year, and tops out/ holds steady at at 1.5 Billion people for the foreseeable future, and that their revenue per user doubles from $4/year to $8/per year -- there's a reasonable $80 Billion valuation for you, but where to from there? Investors buy stock they think will rise in value. Will FB offer a dividend?
Here is the rub with/for FB: The best ads are no ads-- playing the 'Like' game is cheaper, and more authentic for advertisers. Better than Google's search results your posts are more social, cost nothing, and show up in between pictures and posts by friends.
Smart people with that much attention flowing through their systems will figure out the details: which ad formats, which promotions, which virtual/real goods, which novel payment mechanisms. Or maybe someone outside Facebook will figure it out, but then with Facebook's attentional monopoly, Facebook will make it work best. (See also: Overture vs. AdWords.)
And the 'Like' game isn't a threat to Facebook, it's a trump card. They control which 'Likes' get broadcast into friends' daily activity. You could just as well say of Google SERPS vs. AdWords: "The best ads are no ads -- playing the SEO game is cheaper, and more authentic for advertisers." In fact, getting into the prime attentional real-estate that Facebook's algorithms and policies control will be exactly as expensive as Facebook wants it to be.
"Smart people with that much attention flowing through their systems will figure out the details". As an investor, I'm uninspired here -- the details are all that matter to me-- not who the smartest guy in the room is, not at these prices. Think about Enron, or AOL. I'm not seeing what Facebook makes -- this is all very reminiscent of the 1998-2001 tech boom. I know what Apple makes (consumer electronics and software), and what Microsoft makes (consumer software). I know what Google makes (software to help me find the information I want). I know what AOL sold: dial-up internet access. And Enron: natural gas
What does Facebook make? How will they help businesses make more sales and connections using their ad network? Will people get tired of 'liking' businesses, and having their posts appear next to pictures and posts of friends and family?
I agree completely. The "Like" phenomenon feels very much like something you would see on VH1's "Remember the 80's?" The problems arise when people who enjoy using Facebook immediately assume "PROFIT." I would challenge most people lauding this as the next Google to ask themselves how many ads they've clicked on in the past year on Facebook compared to Google.
I don't have any doubt about Facebook's smarts or ability to implement cool social networking things, but the bottom line is that very little of what they offer anybody would pay for.
> Smart people with that much attention flowing through their systems will figure out the details: which ad formats, which promotions, which virtual/real goods, which novel payment mechanisms.
Wow, you just hand waved over a tonne of details.
You should contact Yahoo to see if you can run it. You just solved the exact problem they have. Lots of attention, can't monitize.
An investor/observer doesn't have to solve a company's problems, or even know all the details of its operations. A company is an abstraction. You can evaluate it based on its team, and its market power/sustainable-advantage. Indeed, we should expect the company management understands many things we outsiders do not – or else they're in the wrong jobs.
With Facebook's attentional domination and network-effects, even idiots would be able to build a $20-30B business. Facebook's management are not idiots. They understand the giant success drivers of Google and others in the network era, as well as the risks from upstarts and changing tastes.
Well, anything's possible, and I'd even say that they might do something else that neither us nor them nor anyone else has figured out yet, but I can't speculate there. I see Facebook as a potential AOL without the dial-up service, but with more user loyalty, and a potentially unbreakable monopoly on IM. If they can focus on what they doing best -- helping people stay connected with their friends, and not get lost in the hype of dollar valuations they'll be fine.
As an investor, I'm short Facebook at an $80 Billion valuation.
Possible, but improbable. Google is not resting on their laurels. And there are already excellent mobile search engines like http://www.doat.com/ - and though it is excellent, it hasn't yet made a difference.
I don't have good data on this but a lot of the Facebook ads I myself see are just linking to brand pages on Facebook itself. So the Like game is not free for advertisers, just like SEO is not free, only more so.
Well, there's no pay-per like option right now, so technically I'd say that this doesn't count.
As to your point re: linking to brand page on Facebook, I feel as if this goes to the point that unless and until you let businesses sell on Facebook, and somehow capitalize on that (through a commission fee, or just more ad revenue for clicks to their Facebook store,) I'm not convinced that either Facebook or these businesses are really better off in the long run.
Don't get me wrong, it pays for businesses to have some kind of a Facebook strategy, unless and until Facebook goes the way of AOL. I agree, the Like game isn't free, but I question its long-term sustainability -- do I really want Doritos' posts next to ones from friends and family?
Frankly, I'd rather just see Reddit or Google style ads that look like, and function like the content I came to see in the first place (and as an advertiser I'd pay well for them, but I find Facebook's current ad set-up to be lacking -- as someone who has spent a considerable amount of my own money on Facebook ads).
OK, so if you replace his 38% chance of $200B with 28%, the valuation is still $79B. I think the qualitative point about upside potential stands, unless you find it completely unlikely that they will succeed big.
Based on similar fates of previous social networks / instant messengers de jour. Every few years a new generation of users grew bored with one beehive and collectively left it for a new one. IRC/ICQ/AIM/YIM/MSN/Friendster/MySpace couldnt avoid this fate even everybody thought they could. No evidence points out that FB will be able to avoid people getting bored with it after x years.
Facebook's ad platform is still relatively immature, especially when it comes to long tail advertisers. Hence they have much more potential for growth than say eBay which is a much more mature product.
There are standard advertising features such as day-parting and A/B testing that don't exist on Facebook but would significantly increase conversion rates. They're also choosing at the present not to offer targeting on high-value demographic information (for example by job title - linkedin's CPM is 10x that of Facebook on job title targeted ads) which again would allow them to significantly increase revenue.
Interesting points, ig. When it comes to revenue, I ask myself "Why do people come to your site". The magic for Google/Yahoo is that you come to their site to leave their site, to find answers to questions like "Where can I find a diamond engagement ring?" and then they get the answers, and some highly relevant, highly lucrative ads.
For eBay, and Amazon, you come specifically with the intent to spend money on their site.
For Facebook, the name of the game is to get you on their site, keep you there, and to bring you back tomorrow to chat with your friends, something like AIM was 10 years ago, but with a better ad network. So far, with all of the businesses that want me to like them on Facebook, none of them have asked me to buy anything on Facebook, just spread their ads -- paid and earned.
Could Facebook be the next ebay or Amazon? Sure, if they want to let every business on their site use their "Pay with Facebook" feature to sell anything. For me, this would justify the current valuation not display ads.
Here's a link to LinkedIn's Q2 revenue (120 Million: http://mashable.com/2011/08/04/linkedin-q2-beats-street/), which again shows that display ads (plus premium membership fees) don't add up to what search ads, or commission fees do. Even for a site like LinkdIn which is more popular than either Amazon (30 Billion in annual revenue) or eBay (8 Billion in annual revenue).
I don't doubt the social utility (pardon the pun) of such networks (I am a founder of one myself), but I question just how much revenue these kind of peripheral ads can really generate.
On your Facebook profile set your relationship status to "engaged" and you'll start getting a lot of wedding related adverts. Sure it's not the same as advertising when a user is searching Google for "diamond ring". But a lot of people will never search online for a diamond ring, but they may see an advert on their Facebook for a diamond ring and click on it.
Google strength is that advertising is based upon search intent, it's also their weakness.
Imagine you were De Beers and you wanted to target people on Google who were engaged but weren't googling for "diamond ring", you might think you could buy ads on related keywords like "wedding invites" - but it turns out Google make it very hard to do this. Unless your ad directly relates to the search term you get a major quality score penalty which means you have to pay a huge premium to advertise.
Daily deal sites have been spending a lot on display ads (on Facebook and elsewhere), precisely because of this, because their customers didn't actively search for "daily deal sites" so the only way to reach them is through display ads. And who has the most display ad page views in the world ? - Facebook.
Do you have a source for LinkedIn's popularity being greater than Amazon or eBay? compete.com (not always the most reliable source, I'll admit) lists both sites as being more than 3 times as popular.
When the high P/Es are pointed out about Facebook, the defenders nearly always point out that the platform is immature and/or they haven't monetized yet (this last one is a huge one for Twitter defenders too).
To this I say: you're missing the point and you're basically wrong.
Ads on Facebook are basically spam. They are not things people want to see, not related to anything they're doing, they are at best crude attempts to convert likes into an audience. But they are as welcome as ads on TV are.
Not that advertising isn't (and can't be) effective but there is a time and a place.
On Ebay, if you're looking on Ebay you want to buy or sell something. The intent of an Ebay user is about by definition: you almost certainly want to transact something.
On Google of course you have the intent of search (disclaimer: I work for Google), which is huge.
But on Facebook? Most people just want to share photos, send messages and send updates. Ads are an intrusion.
Probably the most important sentence in this piece is:
> It was not clear what portion of Facebook's $1.6 billion in revenue in the first half of the year came from advertising sales.
Bingo.
Within probably 6 months Facebook will have filed an S1 for IPO. At that point we'll get a far better picture of the sources of their revenue. If the $1.6 billion 2011H1 figure is true I suspect a huge portion of that comes from virtual goods. That's bad.
While I believe that Facebook is a very valuable property I also believe that it comes with huge risks. A few years ago Facebook was scared at the (then) meteoric rise of Twitter. Social networks seem to be incredibly fickle, possibly even generational (as Myspace was). Even with 700+ million users there is always the risk of users abandoning Facebook for the next thing (IMHO).
Also, the games thing is a risk too. Facebook faces the risk of games going elsewhere (eventually as they have an exclusive on many Zynga properties but Zynga doesn't want to be dependent on Facebook long term) or simply new platforms and paradigms emerging, particularly mobile games.
What will be interesting to see is whether Facebook enters the search space in coming years.
You say that as if TV adverts are a failure. TV Advertising spend in the US alone last year was $50bn, that's more than the entire global online ad spend.
While I think Facebook has far more relevance based upon demographic targeting than TV, no-one's disputing that it doesn't have the intent matching that search advertising has (although if they allowed advertiser to target based upon status updates they could significantly close the gap). But that doesn't matter, it has a huge number of ad impressions and even at much lower CPM than search advertising they can still make a fortune.
> I suspect a huge portion of that comes from virtual goods.
Unlikely. Several third party companies have analyzed Facebook ads (based upon pricing which is public and sampling to measure ad fill rate, and surveying big agencies who buy ads direct) and general estimates for last year were that Facebook probably made in the region of $1.5-$2bn from advertising. So if that $1.6bn figure is accurate it seems likely that >90% will be from ads.
I'm not just arguing this as a bystander, I'm arguing this as someone who's bought over 25 million ad impressions on Facebook this year, because my cost per conversion on Facebook is less than my cost on Google (I still buy ads on both though).
TV ads work because, and only if they grab the attention of the viewer. I've bought tens of millions of FB impressions this year myself. The results have been fine, but I've moved on. It's really easy to ignore Facebook ads, and the point of Facebook isn't to help you get off of Facebook, so I don't know how good that is in the long run for any business to buy postage stamp sized display ads on.
Personally, I think that the Reddit model has some potential. Have you checked out/used their system? I think that it's imperfect, as I stated here:
https://hackernews.hn/item?id=2968162
but there are some good aspects, and we've been more successful there than anywhere else.
Out of curiosity If the results were good why did you stop using them ?
I'm currently running my first extended ad campaign on Reddit, I've used it in bursts before, but now I'm gathering data to see if it's still effective over a longer time period.
My current platforms for advertising are: Facebook, LinkedIn, Google, PlentyOfFish, Reddit and Bing. They all have advantages and disadvantages.
We're a start-up with a limited ad budget, but I found Facebook to be a good launching pad for our first several hundred registered users.
With Reddit we really get a good combination on by networking directly with artists (I'm a co-founder of this site: http://www.feed-forward.net the focus of which is to help improve communication between artists) by posting our own works on specific communities on Reddit (I'm a musician, and the other co-founder is a photographer), and when others posting their work from our site to Reddit in conjunction with our paid ads.
With Reddit, my feeling is that you really do have to keep it fresh for people not to tune it out.
I see your point about Facebook ads. In fact, a lot of the ads I see are just linking to brand pages on Facebook itself.
But then you say that there's a problem if Facebook's main revenue comes from virtual goods. That doesn't make sense.
If people are spending most of their time doing fun stuff on Facebook, then virtual goods are probably their biggest profitable business model. And if people get in the habit of spending money on fake stuff, they could soon start buying physical goods too. That won't be intent just based on needs, it will be shopping driven by social pressure and entertainment value.
The reason for that is that likes are essentially a form of permission marketing. If you've liked a brand that company knows:
(1) you're interested in their products
(2) they can push you out promotions via your friend stream for free in the future
(3) they can use you as social proof when advertising to your friends
Obviously this doesn't apply to all businesses, if you're selling a one-off product having a long term relationship with a user ins't important. But if you're a retailer or brand then that long term relationship can have a lot of value.
Facebook could cannibalize all of these markets you mention: nothing prevents them from turning it into a marketplace of new/used stuff and a platform to watch movies on or sell songs. Have a look at the (pirate friendly) Russian vkontakte.ru: whole american TV series and movies can be watched there.
could-- more likely, I think that it won't. What's Facebook do? It helps you connect, and reconnect with friends and family -- what's that have to do with buying and selling goods? Why do I need to watch shows on Facebook, and not somewhere else?
I'm not convinces of this last point -- what my friends and family like has a lot to do with what I like when we do it together moreso than what our actual similarities in taste are.
"Net income in the first half of 2011 came to almost $500 million, according to the source, who wished to remain anonymous because privately-held Facebook does not disclose its results."
I am not convinced that facebook's advertising can ever be as effective as adsense. In fact, i think these numbers represent the revenues from game developers switching to facebook credits (facebook made it mandatory in july, but most developers started earlier).
That measure makes no sense for evaluating the effectiveness of any auction driven ad platform (from the platforms viewpoint), as the price is solely determined by the advertisers. Obviously someone is getting an effective ROI at the current prices, otherwise the prices would fall.
Net income in the first half of 2011 came to almost $500 million, according to the source, who wished to remain anonymous because privately-held Facebook does not disclose its results.
Here's a list of websites by 2010 revenue:
http://www.incomediary.com/top-earning-websites-in-the-world...
You'll notice that just about every site in the top 15 sell goods and services (physical: Amazon, eBay or digital: Netflix, iTunes) or search ads (Yahoo, and Google). Display ad based sites languish at the bottom for several reasons, including the fact that the content of those ads are not what you came to the site to engage with.
If the numbers are right, then Facebook is bringing in about 1/3 the revenue of eBay, but analysts on secondary markets and elsewhere are giving it a valuation twice that of eBay's: http://finance.yahoo.com/q?s=EBAY or five times that of Yahoo's which has twice the revenue: http://finance.yahoo.com/q?s=YHOO
Hopefully people can see through the hyperbole, and find a fair market value for this company.