The $100-billion question
Just over a year ago I asked whether Facebook was really worth $50-billion. On Thursday I got my answer: No, it’s worth more like $100-billion. After years of flirting with the market, Facebook has finally opened its kimono and started the process of offering its shares for public trading.
On February 1, Facebook officially registered its initial public offering (IPO) with the Securities and Exchange Commission (SEC), the agency that oversees the US’s vibrant stock markets. Its registration document, the normally bone dry “Form S-1” or S-1 for short, makes for fascinating reading.
Most investors would skip straight to the income statement, and they won’t be disappointed. Facebook has long claimed high revenues and ongoing profitability, but until this point those were just that: claims. Its S-1 spells out the numbers in legally binding clarity.
In 2011 Facebook earned over $3.7-billion in revenue. That may seem like small beer compared with Google ($37.7-billion) or Amazon ($48-billion), but Facebook is less than half the age of those two web giants. More important is its net profit figure—$1-billion for 2011—and its dizzying growth. It earned “just” $777-million revenue and made $229-million in profit in 2009—so it has tripled its numbers in three years.
But even these numbers don’t fully explain the putative $100-billion valuation. That number implies a price to earnings ratio of 100. In other words it would take a century of steady $billion-per-year profits before the company earned as much money as its shares are currently worth.
This is obviously ludicrous. Few people hold shares for 10 years, let alone 100. So how can anyone justify the value? Simple: investors expect the already hectic revenue growth to actually accelerate.
The S-1 reveals plenty of reasons for their optimism. Here are two of the most staggering sentences: “We had 845-million monthly active users (MAUs) as of December 31 2011, an increase of 39% as compared to 608-million MAUs as of December 31 2010. We had 483-million daily active users (DAUs) on average in December 2011, an increase of 48% as compared to 327-million DAUs in December 2010.”
Let’s put that into perspective. Every day, more people log onto Facebook than live in either North or South America. One out of every nine people on the planet uses Facebook on a monthly basis. And it is still growing.
Since Facebook is essentially in the business of selling its users’ attention to everyone from consumer brands to online gaming sites, the more attention it attracts, the more it has to sell.
And because it knows so much about you—what you like, where you live, who you’re friends with—Facebook has an unprecedented opportunity to present you with adverts and offers you are likely to find interesting and useful. This kind of targeted offer is a holy grail for advertisers.
Of course there are no guarantees. MySpace looked like a fantastic bargain when Rupert Murdoch snapped it up for $580-million in 2005. Last year it was hastily sold to Specific Media and Justin Timberlake for approximately $35-million. Oops. Who killed MySpace? Oh, right.
The internet is as Darwinian a market as we’ve ever seen. Some scruffy kids in a basement somewhere may already have started writing the code that will usurp Facebook in exactly the same way it did to MySpace. But until those kids actually launch their site, Mark Zuckerberg will be sleeping pretty well.