At $100bn, odds are Facebook’s a bad bet

By Craig Wilson

Last week, Facebook took the first step to becoming a public company by filing its S-1 documents with the US Securities and Exchange Commission. Enormous figures are being bandied about but, as with Google, which listed the year Facebook was founded, the question investors have to ask is whether it’s sensible to invest in a company that deals in the intangible and that counts people, a notoriously fickle species, as its primary product.

Valuations of the company now range somewhere between US$75 and $100bn, quite extraordinary for a company that’s eight years old.

Backing the blue horse means you believe it’s going to keep growing and that its advertising model is going to become ever more effective, prompting companies to spend more of their ad budgets on the platform.

It’s also means betting that people are going to agree that searching with a social element is better than searching without one; that each successive generation is going to value its privacy less than the previous one; and that no newcomer is going to come along and win over Facebook’s users.

That’s a whole lot of boxes to tick and, even though Facebook doesn’t have to tick them all at once, each presents a potential stumbling block and calls into question the valuations being thrown around for a company that generated only $3,7bn revenue in 2011.

The sky-high valuation — at $100bn, Facebook will have a trailing price-to-earnings multiple of 100 times versus Apple’s 13 times — is predicated on the idea that Facebook is going to continue to enjoy the sort of robust growth over the next decade that it’s enjoyed in the last few years. Is that possible? Maybe.

For a start, Facebook still has plenty of potential users it can tap in emerging markets like Brazil and India. Millions of people are getting online in these countries for the first time, primarily via mobile phones.

In fact, in its S-1 listing documents, Facebook says half of its users access the service via mobile. But in the same breath it says it hasn’t yet figured out how to monetise its mobile platforms to meaningful extent.

Monetising mobile isn’t an insurmountable challenge, but it’s one that will have to be addressed.

Though mobile presents the potential for location-based advertising, it remains a notoriously difficult medium because consumers, both young and old, are far less tolerant of ads when screen space is so limited.

Companies with much lower multiples, such as Apple and Microsoft, make tangible products. Facebook doesn’t have a product per se. Rather, its product is us, and it uses our information to help advertisers target us.

Facebook makes 85% of its revenue from ads, but a growing number of users are also using third-party applications to block ads.

Then there is the issue of sharing. Facebook works because people, particularly youngsters, value the ability to share more than they value their privacy. But this may not always be the case.

And then there’s the problem that Facebook is eventually going to run out of people to sign up. Though new markets may keep numbers ticking over for a good many years to come, there’s a risk more mature markets will become apathetic.

Facebook is no doubt painfully aware that just as it overpowered MySpace, another service could potentially do the same to the Palo Alto-based company. Without users, Facebook has nothing to sell — which is why we can expect it to diversify its offerings and include financial services, Internet search and anything else that will keep users on the site for longer.

Another worry is that, for a company that’s all about sharing, there’s little sharing that goes on at the top. Zuckerberg may only own 28,4% of the company’s shares, but he has in the region of 56% of voting stock and will maintain iron-clad control over the company. That has to be alarming to potential shareholders who aren’t used to companies behaving that way.

There’s no denying Facebook is growing like wildfire, and its figures to date have been the stuff investors dream about, but it seems bizarre to think it can keep it up. After all, there are only so many people on earth and once you’ve got them what happens next?

Share this article

  • Greg Mahlknecht

    >>After all, there are only so many people on earth and once you’ve got them then what happens next?

    You sell them more stuff.

  • Peter French

    Two things. There is a minor typo with a major impact here. Facebook revenue was ~3.7 Billion $ (not million) in 2011 with around 1 Billion $ profit. Doesn’t yet justify the price tag, but it definitely is moving in the right direction. With 800 Million Revenue in 2009, 1.9 Billion for 2010 and now 3.7 B $, 2012 could spell 6 Billion and 2013 8 Billion. With figures like these, it starts looking like a more lucrative investment… Or am I mistaken.

  • Craig Wilson

    Hi Peter,
    You’re quite right about the typo, my apologies and thank you for pointing it out. It’s duly been corrected. The growth in Facebook’s revenue over the last three years has undoubtedly been phenomenal, but the question is whether it can maintain that sort of expansion for a decade – which is roughly what it would need to match a valuation in the $100bn range. My suspicion is that it can’t, particularly in an industry that changes so quickly. I have little doubt that when shares do hit the market there will be early growth, but I’m less convinced that investing in Facebook will pay off in the longterm. It’s certainly going to be fascinating to watch.
    All the best,

  • Vincent Mabuza

    Craig you’re spot on about this. To
    add to the list of your concerns; Facebook stated in its filing that it does
    not generate revenue from Facebook mobile, which accounts for 425 million
    users. Sure they can start putting ads in our feeds but this won’t help much,
    since mobile CPMs and CTR are low and also putting ads will mess up the User Experience.

    Another problem is that a lot of Facebook’s
    advertises are complaining that, FB ads are not effect at all; I see this as Facebook’s
    biggest problem and will eventually mess up its value.

    Another thing that will surely kill Facebook is the fact
    that Facebook is no longer “cool” and Facebook fatigue is setting in. People
    are slowly getting tired of Reading others Statuses, seeing naked pictures, commenting
    and also getting annoyed at people exaggerating their lives on there. This is
    leading to less activity, deactivations and Migration (especially under 25s) to
    twitter, tumblr and Pininterest (older crowd).

    So if you want to purchase the stock in order to flip it DO
    IT you might make cash, but long term *Shaking Head*



    I believe Facebook is going to trigger a bubble in this
    “Social Location Mobile” era

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