When Facebook went public last week, the company was valued at $104 billion, an astonishing figure for an Internet company. Is the figure preposterously high? That depends on how you look at it. The value in Facebook lies in its enormous audience—901 million people every month who are potential viewers of advertisements and buyers of virtual goods. So you could think of Facebook this way: it is worth about $116 for every user it has. On that basis, the company isn't being valued as highly as Google ($200 per user) or even the question-and-answer service Quora ($145). This metric also reveals that investors are much less optimistic that Twitter (worth less than $60 per user) or Tumblr (about $8) will profit handsomely from their very large audiences.
Another reason this metric is useful: it indicates that for all the hype around Facebook and its kin, the situation isn't as hyperbolic as it was in the dot-com boom. Remember Excite, one of the first Web portals? It and its 18 million users were worth as much as $6.7 billion—$372 per user—to the @Home Network in 1999. The next year, Lycos was valued as highly as $12.5 billion, or $431 per user. It might be of little solace that valuations aren't as inflated as they were 12 years ago, but at least today, unlike then, there is a sizable amount of Internet ad revenue to vie for.
COMMENTARY: An initial public offering is the first chance for a company to truly find out its worth. Facebook earned a valuation of US$104 billion when it went public on May 18, in the most anticipated IPO in years. That valuation is also 104 times bigger than the company’s profit in 2011, causing some to worry that Facebook is overpriced. For perspective, we’ve applied the same measure—market capitalization divided by profit—to other notable public offerings to create our own IPO Hype Meter.
The result: the Facebook frenzy is intense but not unprecedented. A pricey IPO doesn’t always mean poor returns in the short-term; hype can help drive shares higher over the next year. But Facebook’s high valuation has so far proven to be unwarranted. The company’s share price plummeted 26% during the first three days of trading, helping to confirm what many academic studies have shown: investors tend to get better returns over the long run from IPOs that debut at more reasonable prices.
Unlike the Google IPO, Facebook's business model is still a work-in-process and advertisers are still having a problem with ad effectiveness and showing quantifiable ROI's from their ads. Just before Facebook's IPO, General Motors cancelled $10 million in Facebook ads for this reason.
Mark Zuckerberg and his team are still struggling to monetized the social giant. Average revenues per active user are down in spite of Facebook increasing the number of active users from 660 million at the end of 2010, then 800 million at the end of 2011 and 901 million active users at the end of March 2012. Facebook's average revenues per active user were $1.17--down by 7% from Q1 2011.
Advertising makes up 85% of Facebook's revenues, and although Facebook's user engagement is at an all-time high in minutes, the ad-supported revenue model is showing definite signs of having reached a critical inflection point (see my March 20, 2011 blog post) as growth in users dramatically slowsdown due to market penetration saturation in several key geographic markets (North America, Canada and Western Europe).
488 million users now access Facebook on their mobile devices. When I first modeled Facebook's critical inflection point, I failed to take into account this dramatic shift in mobile Facebook users, and this has exasperated the effects of the critical inflection point as Facebook impressions are quickly shifting from the desktop to mobile devices, making it difficult for Facebook to sell "bigness" in ad impressions, its primary advantage in whooing Madison Avenue. In short, Facebook has been unsuccessful in monetizing the huge growth in mobile Facebook users, and this has been a huge strategic blunder.
In a Bloomberg article dated May 10, 2012 by writer Matthew Ingram, he noted that in Facebook's amendment #8 to its IPO filing, it mentioned that monetizing mobile poised a potential investor risk. Kevin Fitchard's February 2, 2012 article appearing in Gigaom voiced a similar warning calling mobile "Facebook's kryptonite." Fitchard pointed out that Facebook expected the rate of growth in MAU (monthly average users) of its mobile products “will continue to exceed the growth rate of our overall MAUs for the foreseeable future” but added that the company didn’t “directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
On January 25, 2012, eMarketer estimated that mobile advertising spending in the US reached $1.45 billion in 2011, up 89% from $769.6 million in 2010. It forecasts that US mobile ad spending will grow 80% to $2.61 billion in 2012 and reach $10.83 billion in 2016.
According to eMarketer, Google dominates mobile advertising with revenues of $750 million or 51.7% of the total market. As you can see, Facebook is nowhere to be found.
Facebook is moving quickly to address their weakness in mobile advertising through several strategic acquisitions:
- In November 2011, Facebook acquired Gowalla, the location-based social network, with only 2 million users for a reported $25-$30 million, but the site was shutdown in January 2012. Facebook claimed it acquired Gowalla for its talented team to shore up its weakness in mobile.
- On May 4, 2012, Facebook acquired Glancee, an iPhone mobile app that lets users sign in with Facebook, and let's users locate other people who have things in common with them within a certain radius. The app had 20,000 monthly active and 3,000 daily active Facebook-connected users in April 2012, according to AppData tracking service. Its competitor, Highlight, has 80,000 MAU and 9,000 DAU.
- In May 2012, Facebook acquired Instagram, the fast growing mobile photosharing app with nearly 30 million users for $1 billion. Instagram received the Mobile App of the Year for 2012 award. However, the price tag is very questionable given that Instagram had zero revenues.
- On May 15, 2012, Facebook acquired Lightbox, a U.K.-based iPhone mobile app that lets users share photos for an undisclosed price tag. This shores up Facebook's photo sharing capabilities overseas.
- On May 21, 2012, shortly after its huge IPO, Facebook acquired Karma, a social gifting mobile app. The acquisition was done in order to capitalize on Karma's expertise in mobile.
In a blog post dated May 26, 2012, I compared the advertising models between Facebook and Google, and it was the unanimous opinion of many digital marketing experts, that Facebook is a failure as an advertising platform. I could not agree more.
So is Facebook worth $110 per active user? I don't think so. This is a company whose IPO valuation was based mostly on smoke and mirrors and not much else. Not only was the IPO itself bungled due to over-pricing the stock offering, floating too many shares and NASDAQ technical gliches, but most of the valuation was based on what the stock was selling for in the secondary market just prior to the IPO date. That valuation is grossly out-of-step with what Main Street investors perceived Facebook stock was worth. The result was that Facebook never got the desired "pop" in price for an IPO of that magnitude. Since the day of the IPO, Facebook shares have continued to plummet from the original offering price of $38.00 per share to $31.91 at the close of trading on May 25, 2012, and I don't see this situation changing much anytime soon.