Assuming earnings of $205M per quarter and a valuation of $100B, that would put Facebook's P/E ratio at 122. Today, Apple is at 16.3, Google at 18.1, Netflix at 24.4, and Microsoft at 11.7. Now, it's completely possible that Facebook's earnings growth will outstrip those more established companies. However, it does show that one has to think Facebook will grow its earnings at a considerably faster rate than those companies to be a good value at a $100B valuation.
Myself, I don't see Facebook necessarily going the way of AOL and MySpace. Facebook's engineering chops are a lot better. Sure, there's an amount of social lock-in that they shared with AOL and MySpace, but that isn't the only thing keeping Facebook on top right now. Facebook has made sure that their site runs well - a minimum of errors, predictable and decently speedy response, and a willingness to address technological challenges that keep the site humming. While we might lambaste Facebook a bit from a social perspective, they've open sourced some genuinely good tools and seem to be sticking to their technological guns. Unlike MySpace, AOL, and Yahoo, Facebook isn't morphing into a company where "media" types run the show. While the social aspect is very important for Facebook, I think there's a more engineering-centric or engineering-friendly culture that will persist there like it has at Google. I don't see the higher-ups at Facebook thinking "oh, I get the cool stuff the kids today are hip to and I just need some peon programmer to translate my awesomeness into computer speak. All programmers are interchangeable cogs, right?" I think that does speak to Facebook's longevity. In technology, you need to be able to improve your product, not just keep the lights on.
However, Facebook relies on non-technological factors more than Google or Apple. Facebook needs to remain the place people sign up when they join a social network. It isn't too hard to imagine Facebook becoming the place known as the hangout for people's parents. As someone in my twenties, I'll probably have teenagers in 15-25 years (a decent number of my friends will in 15 years). Will they want to be on the social network that I'm on - the social network of my generation? It's already weird to me when old people sign up for Facebook. I don't want to "friend" my actual friends' parents. Frankly, I'm a (slightly) different person when I'm talking to my friends and when I'm talking to my friends' parents. Likewise, Facebook is treading a thin line on sharing. In the early days, Facebook was very closed and putting something on Facebook felt more private. Facebook has been slowly changing that to the point that I wonder whether I should just edit myself a bit more and publish publicly rather than on FB in a more formal way (ie. a blog). Finally, people could just get tired of it. I'm finding less interesting things in my newsfeed as time goes on. I find that I don't feel like posting as much.
For me, Facebook's valuation at $100B seems high given its earnings. It's PE ratio is above 100 and so one has to assume much more growth than other very good companies. It might happen. However, I think Facebook faces a decent amount of uncertainty in its future. It's well-engineered and well-run compared to those who have failed that we might point to as Facebook's future, but with a social product there's more than just having good service and any number of things could hurt Facebook from privacy concerns to becoming the network of the people who went to college from 2000-2015 while younger folk find a different place to digitally hang out. I wouldn't compare them to AOL, Yahoo, or MySpace, but I'd still say Facebook's valuation is quite high.
Facebook's valuation is based on potential, as opposed to any real metrics. It has a staggering number of active users and frightening amounts of data about them. The bet is that they find a way to capitalize on it.
I'm not bullish on facebook by any stretch of the imagination, and their P/E is ridiculous, but it's also the wrong metric to be looking at when deciding whether it's a good investment.
> It has a staggering number of active users and frightening amounts of data about them
The financial value of those users must grow super-linearly. The most recent figures I can find put them at having 901 million active users, which means they're valued at $111 per active user. Crazy stuff.
If they can sell a $3 CPM, and each user loads 40,000 impressions lifetime, then they've monetized each user at $120 over that time period. That's a lot of impressions per user, but people click a lot on facebook. Plenty of room for them to grow.
That's a ridiculously high CPM for social media. The page views are very low value, even with all the targeting. Considering their revenue now and their traffic figures (over 1 trillion page views a month), their average is currently very low. $1B / 3T page views = $.33 RPM. They get a decent chunk of revenue through things other than advertising (namely their payments system) and that's a low-ball on the traffic, their traffic is very low value. Further growth is likely to come from international markets that are also very tough to monetize. To get that RPM up 10-20x would be astonishing.
I still don't see their endgame being traditional display advertising. It just can't provide the kind of cash they need. I think we'll see the engineers at facebook find ways to directly exploit the value of their network, but I only have vague notions of how they might do that.
Honestly (as not a familiar of FB's advert system), can they sell a $3 CPM? On every impression of a user -- inventory typically degrades as session-impressions degrade?
40K impressions would require 110 pageviews/day over 365 days. For comparison, Reddit averages 13 pageviews/visit [0]. I imagine both are largely dependent on their image traffic; can we draw conclusions between the two? Anecdotal evidence would have me believe I load less "ad pageviews" on Facebook than Reddit.
Nice writeup.. one thing I'd add is that usually when companies are given 100 P/E type valuations, it's because everyone's assuming they have lots of growth in front of them. FB is already a dominant player that pretty much _everyone_ in developed countries is either using or has decided not to use. Is there really a scenario in which one sees the usage doubling or tripling down the road? It seems like you'd need to believe that to support a 100 P/E and ~20x sales kind of valuation. 30B or so seems like a much more viable level.
I doubt it's based on userbase expansion so much as it is a bet on massive monetization.
Personally, with their existing model, I think that's tough. Unlike search, the monetization rates just won't be that high, since it's not a point where a user is trying to solve a problem they're willing to pay for.
But they might surprise us, and if they find a good monetization model, that's a lot of collective person-hours of exposure.
I think you've hit the key - if they find a good monetization model. I remember an article on here about Facebook shutting down a social shopping experiment, but if that had panned out it could have been huge. There are always rumblings of "social search" every once in a while. Likewise, it isn't hard to imagine communications changing in the next 10 years to a system where your wireless carrier is just a data connection and Facebook could potentially power VoIP and video communications over that.
But I think the valuation is quite high for a potential that they haven't shown they can leverage their users toward. Google hasn't shown that it can leverage its might toward, say, social. However, Google's valuation isn't so high compared to its earnings. For me, it's a big bet to assume a company can drastically change its monetization.
So it's based on the assumption that to date, they've failed to efficiently monetize their user base? They've had advertising for years. They're not going to start charging users. Shopping stuff is great but it's basically affiliate sales.
Saying "we're super popular, and we're going to figure out the monetization later" is pretty bubbly. It's equivalent to "ignore the financials."
Only way I can see them fitting into $100bn valuation is if they come out with an AdSense competitor that not only is contextual, but if you are signed into FB also based on your likes/social graph.
Myself, I don't see Facebook necessarily going the way of AOL and MySpace. Facebook's engineering chops are a lot better. Sure, there's an amount of social lock-in that they shared with AOL and MySpace, but that isn't the only thing keeping Facebook on top right now. Facebook has made sure that their site runs well - a minimum of errors, predictable and decently speedy response, and a willingness to address technological challenges that keep the site humming. While we might lambaste Facebook a bit from a social perspective, they've open sourced some genuinely good tools and seem to be sticking to their technological guns. Unlike MySpace, AOL, and Yahoo, Facebook isn't morphing into a company where "media" types run the show. While the social aspect is very important for Facebook, I think there's a more engineering-centric or engineering-friendly culture that will persist there like it has at Google. I don't see the higher-ups at Facebook thinking "oh, I get the cool stuff the kids today are hip to and I just need some peon programmer to translate my awesomeness into computer speak. All programmers are interchangeable cogs, right?" I think that does speak to Facebook's longevity. In technology, you need to be able to improve your product, not just keep the lights on.
However, Facebook relies on non-technological factors more than Google or Apple. Facebook needs to remain the place people sign up when they join a social network. It isn't too hard to imagine Facebook becoming the place known as the hangout for people's parents. As someone in my twenties, I'll probably have teenagers in 15-25 years (a decent number of my friends will in 15 years). Will they want to be on the social network that I'm on - the social network of my generation? It's already weird to me when old people sign up for Facebook. I don't want to "friend" my actual friends' parents. Frankly, I'm a (slightly) different person when I'm talking to my friends and when I'm talking to my friends' parents. Likewise, Facebook is treading a thin line on sharing. In the early days, Facebook was very closed and putting something on Facebook felt more private. Facebook has been slowly changing that to the point that I wonder whether I should just edit myself a bit more and publish publicly rather than on FB in a more formal way (ie. a blog). Finally, people could just get tired of it. I'm finding less interesting things in my newsfeed as time goes on. I find that I don't feel like posting as much.
For me, Facebook's valuation at $100B seems high given its earnings. It's PE ratio is above 100 and so one has to assume much more growth than other very good companies. It might happen. However, I think Facebook faces a decent amount of uncertainty in its future. It's well-engineered and well-run compared to those who have failed that we might point to as Facebook's future, but with a social product there's more than just having good service and any number of things could hurt Facebook from privacy concerns to becoming the network of the people who went to college from 2000-2015 while younger folk find a different place to digitally hang out. I wouldn't compare them to AOL, Yahoo, or MySpace, but I'd still say Facebook's valuation is quite high.