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Only $50B? Facebook Stock Is Still a Steal

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Everyone from The New York Times to Fortune to CNN has been weighing in to decry the excessive hype leading to Facebook’s reported $50 billion valuation, as if there’s some immutable law of nature that private Internet stocks can’t be worth that much.

I don’t have any inside information about Facebook’s finances, and I’m not a Goldman client. But I’m convinced that when we look back at this investment, it will rank as one of the best stock opportunities available today — akin to buying Apple stock just before the release of the iPod.

Yes, there are many examples of unjustified Internet hype in the market today, but Facebook isn’t over-hyped; it’s simply an exception to the rule, a once-in-a-decade occurrence of a company that fundamentally changes the way we live and work, and has built a profitable business with huge growth prospects in the process. Let me explain why I’m so sure of this.

Advertising isn’t a business model? Tell that to Ogilvy

Detractors point to Facebook’s business model — advertising — as evidence that the company can’t possibly be a big business. Isn’t advertising a $210 billion business in the U.S., and about three times as big globally? So the objection could be that Internet advertising isn’t “real.” But hold on: internet advertising is expected to be a $25 billion business and grow 70 percent by 2015. And while SNL Kagan doesn’t yet break out social advertising as a category (I bet they do soon), Facebook reportedly did close to $2 billion in revenue last year; pretty good for no business model.

Sure, there is something behind our general fatigue toward websites with online advertising-based business models. There are innumerable small, sub-scale sites that can’t get the attention of premium, brand advertisers that drive the bulk of this spending, due to the small, fragmented size of their audience. But let’s not throw Facebook under the bus based on this. This is a site that reaches 500 million, sorry, no, 600 million people–- half of whom log in every day -– with a wealth of data that allows targeting on a level never before seen. Want to run a campaign that reaches fans of Natalie Portman? Facebook just happens to know 61,860 of those in the US. What about Lady Gaga fans who speak French? 23,060. Men who like Aardvarks? 2,260. You get the idea.

Detractors point to the current state of Facebook’s sales team and ad units as evidence that it won’t be a big business. I sometimes hear people say “well, I’ve never clicked on an ad, so…” usually trailing off afterwards. Think of it a different way: Facebook built a business with $2 billion in advertising revenue, and you’ve never clicked on an ad? Imagine how big it will be when you do start clicking…regularly. The television industry has had 60 years to evolve its ad formats and sales forces; Facebook’s only been at it with any seriousness for the past three or four years. Give them another two or three to get it perfected.

Facebook has sound fundamentals — no, seriously

Let’s assume that the data reported in The Wall Street Journal is accurate, and that Facebook ended 2010 with close to $2 billion in revenue, implying $500 to $600 million in profit using the range of reported profit margins. That’s a revenue growth rate of 157 percent and a profit growth rate of 150-200 percent from the $200 million in profit reported for 2009. If true, it would actually be conservative to expect their profit to double in 2011, implying a forward P/E of 42-50 for the Goldman investment, which puts it right in line with those of Amazon (53), Baidu (45), and Netflix (49). What’s so unreasonable about a forward P/E of 50 for a company like Facebook with an audience size and engagement level that implies many more years of doubling revenues and profits ahead?

The problem is that now that financial data is trickling out, we’re comparing Facebook to public stocks of similar size, and public market investors just aren’t used to companies that have more than doubled their revenue and profit in the past year and can credibly forecast to continue to do so – for at least a few more years. Comparisons to Google’s current financial ratios are spurious, for Google’s several years of post-IPO meteoric growth are well behind it. The company has grown less than 10 percent a quarter for the past 5 quarters.

Facebook is no one-trick pony

The vast majority of Facebook’s revenue today comes from one form of advertising or another. Remember last year’s brouhaha over Facebook Credits and Facebook taking a 30 percent cut of developers’ revenue? Given the size of companies like Zynga (once estimated to generate $50 million in revenue per month), won’t that be an even bigger number over time? Considering that Credits weren’t rolled out until the end of 2010, I’d think of this entire business as “new” over the current revenue base. And given the company’s breadth and usage, who’s to say that Facebook couldn’t make a run at other, already proven business models like Web search and local advertising?

Think Apple Stock is too expensive? Buy shares in another visionary

Call me old-fashioned, but here’s something else Goldman clients are buying with their Facebook shares: a team led by a visionary, not unlike Steve Jobs, who’s highly skilled at predicting our future modes of personal communication and interaction. In Mark Zuckerberg, Facebook’s stockholders are getting someone who has the foresight to shape the future patterns of how we spend our time and keep in touch. And he’s demonstrated an ability to execute on these prophecies in spite of protests by the vocal masses. Remember the uproar when Facebook released its news feed back in 2006? The company apologized at the time for a lack of communication but completely ignored the general consensus and kept the news feed intact. Anyone want to eliminate it today? It’s now the focal point of the site and the basis for zillions of hours of activities and eyeballs. Remember predictions that no one would spend their time using applications on the Facebook platform? Tell that to the 18 million people that played CityVille today, and the 2.5 million developers building on the platform. And these are just a few of the many product innovations like photo tagging that Facebook has made commonplace.

What could possibly go wrong?

Well, plenty of things. We all remember AOL and Myspace. This kind of skepticism has plagued Facebook at every turn –- only to be dismissed as the site achieves the next milestone and continues its exponential growth without missing a beat. I’m sure eventually there will be another technology juggernaut that emerges to steal back our time and scare Facebook about being disrupted. But this has never happened overnight, and no one is pointing to a company or idea currently out there that presages Facebook’s irrelevance.

I look forward to Facebook going public so that we finally have access to its financial data. Only then can we advance this debate as to whether we’re truly looking at a “once-in-a-decade” kind of company. In the meantime, I’m sure we’ll see a lot more backlash against the “hype.” I won’t have time to read it though; like a lot of you, I’ll be too busy perusing photos of Bali beach vacations taken by junior high-school classmates to whom I haven’t spoken in years. And maybe I’ll even click on an ad or two in the process.

Ethan Kurzweil is a Vice President with Bessemer Venture Partners in Menlo Park, California. He works with Internet companies of all types, including Playdom, Zoosk, Crowdflower, Twilio, Reputation Defender and OpenCandy. You can find him on twitter at @ethankurz. The views expressed in this post are his own, and do not represent those of Bessemer. Disclosure: Ethan has a very small position in a Facebook secondary vehicle, purchased in 2010.

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43 Responses to “Only $50B? Facebook Stock Is Still a Steal”

  1. I really hope going public doesn’t change too many things with Facebook, usually when there are other hands in the pot, a lot of different changes happen in the “best interest” or primary shareholders and this tends to screw up companies in the long run. As long as they can maintain their locus of control of the company, Facebook should be good to go.

  2. Gigaom comment


    I agree with a lot of what you say, but then you lose credibility when you class Zuckerberg as a visionary, and in the same sentence as Steve Jobs.

    Facebook is nothing more than earlier explicit social networks like friendster, and implicit social networks like Aol and msm, combined with legacy technologies like MS Passport and Adsense.

    The difference between google and Facebook is that users can simply access google without jumping a wall, while all it would take for an alternative to FB is if hardware OEM’s were to pre-install something different – imagine if Apple shared Facetime with Microsoft, and Ping is only the Rokr of a social-network.

    The worst aspect of Facebook and its geek trend-setters, who should have known better, if they really were smart and as Tim-Berners Lee knows, is that it usarps the Symantic web based on open standards and connections without proprietary control in a single private bottle-neck!

    The single greatest advantage it’s current size and hype gives Facebook is the fat and latentcy (/training wheels) to develop various monetization streams, and acqire/copy innovative potential competitors, but is it going to be the google of the web as a good citizen or the eBay, where few users have positive feelings over it being a necessary evil.

    The likes of Zynga could quickly move their entire userbase to their own, with absolute control, removing the motivation of a large number of users ( – the body of the long tail) from Facebook, after all, how much overlap is their between the two, and once the pool of users is large enough, it becomes a self-perpetuating viral network – just as Facebook was!

    On the other hand, if fb had real vision, which they really don’t, they would buy Linkedin………………….  ;)

    Yours kindly,

    Shakir Razak 

  3. “a company that fundamentally changes the way we live and work” ?

    Yeah, no hype there at all.

    If Facebook has changed how you live and work, then may I suggest you get out more often.

  4. It’s a great investment opportunity if you’re one of Goldman Sachs’ exclusive clients. If you’re a ordinary investor, um….no. Those crooks in Goldman Sachs and the people who’re now buying FB stock in the secondary market will short sell when it goes public.

    • I agree – although I think it might go up for a while, just to give the signal that it is going up and to force the wannabe smart guys to cover their shorts – and then it will fall like a rock taking down the average investor.

  5. I truly hope your valuation is wrong in the long run.I like Facebook, the company the idea what it has done to transform communication and getting in touch with people. But what I am scared of is monopoly, its never good power turns fatal when abundance is available. I hope there will be something else in the next coming years to go above Facebook.

  6. I’ve been talking to folks advertising on Facebook and they’re all really impressed by the response. And they’ve noticed that the prices have been really great but are starting to inch up.

    FB’s targeting mostly kicks ass and folks want that.

    Personally speaking, I rarely click on ads and the FB ads for my account are not that interesting. But that means they can improve as more advertisers come online. And they can keep raising prices as that happens.

    Just because I’m not digging the ads right now doesn’t mean I dismiss FB because of that. That would be kind of dumb.

  7. I disagree with Ethan who makes weak speculations without having any experience in online advertising.

    I am an Internet marketer, so I am very familiar with their ad platform.

    The quality of their traffic doesn’t generate enough ROI for MOST performance based advertising compared to Google because FB users aren’t anywhere in the conversion funnel. This means low conversions for the advertisers, and accordingly low CPCs. Only sleazy “impulse ads” like weight loss, debt relief, and dating ads etc have a shot at grabbing users attention and getting them to convert. FB users logon to checkout pics of their hot friends, not to buy airline tickets or apply for mortgages.

    When it comes to branded advertising, you have to wake up to the fact that Facebook is just a tricked out photosharing + timewasting + Twitter site, and its no secret that these kinds of sites command notoriously low ad CPMs. Yes, you can target people by interests, age, gender, etc, but still, that’s not enough to turn junk traffic into gold. The only reason their brand advertising revenue is coming in so high is because it’s easy for lazy corporate ad buyers to dump big $$ on FB campaigns because of the sheer size of FB. However, vertical networks with QUALITY AND TARGETED CONTENT like Glam have a better shot at commanding premium CPMs than Facebook.

    Before Google launched Adwords, a lot of Google doubters and naysayers questioned how they could possibly make money. HOWEVER, to the early eCommerce merchants of that time, the TREMENDOUS value of Google was obvious because they were relying heavily on the traffic and sales from organic Google search referrals.

    The FATAL FLAW I see with Facebook today is that it doesn’t seem like any businesses besides Zynga are seeing significant value in this platform. If FB were to vanish overnight, pretty much only Zynga would be crying, other ad-buyers would go somewhere else to dump their ad dollars, and the users would find a new photosharing site to populate.

    Social networks have come and gone. So have blog networks. So have photosharing sites. What makes Facebook any different?

    • Thanks for the comments. Actually I did sell online advertising on when I was at Dow Jones but that’s sort of besides the point.

      I don’t understand why you don’t think Facebook can attract brand dollars as compared to vertical ad networks like Glam? Are readers of Glam in a different spot in the conversion funnel? Seems pretty equivalent spots in the funnel to me and yes, while Facebook’s CPMs are lower now, I attribute that to their sales force being in the market for less time and not having as much of a chance to fully educate Madison avenue as to the value of social ads. (And they don’t really need to raise CPMs that much to grow revenue appreciably given the size and growth of their user base.)

  8. wrt: “akin to buying Apple stock just before the release of the iPod…”

    It may be true that FB is a good investment at a $50B valuation, but comparing to AAPL stock back then seems speculative for the following reason.

    The iPod was released on October 23, 2001. If you had bought AAPL on October 22, 2001, the stock would have cost you ~$19. Today AAPL is trading at ~18x that original investment. Thus, if your statement is correct, in 10 years, Facebook stock would be trading at at 900B market cap, more than double the (current) market cap of XOM. Note that XOM is on track to earn (yes, EARN), more than $30B this year.

    Great analysis otherwise, though!

    • Mark: You’re absolutely right – the analogy to AAPL before the ipod doesn’t work as I’m by no means implying this is a $1 trillion company in 3-4 years (although I did just see a piece in Valleywag implying that Zuckerberg is shooting for that!) – how about Apple before the release of the iphone? I think there’s been about a 3-4x since then.

  9. Facebook is the standard of communication for an entire generation. If you can invest in a standard, you better do because standards stay for a long, long time. Would you invest the inventor of the phone? Would you invest in the inventor of a window-based operating system? Would you invest in the inventor of the television?

  10. Yousef Soliman

    This is the kind of shit that causes big crash and burn scenarios. Ok, cool, you’ve done $2B in revenue, and an assumed $500-600m in profit. How the fuck does that justify a valuation at $50B, 100x more then their annual profit?

    All these VC’s backing companies that have no real revenue strategies, look at Twitter. How they managed to go back for additional funding rounds, I’ll never know.

    Facebook wasn’t created as a business, and as such looks for revenue stream options to push onto it’s 600m users, rather then having a product and then pushing people towards it.

    The day idiots stop thinking about volumed user count, and begin to think about the actual bottom line I’ll cry tears of joy.

    I’m all cool for building applications which help people out and what not, but for me there’s a fine line between Twitter and a charity, in the sense, Twitter is a great application which helps a lot of people – but it doesn’t turn a profit.

    Just to clarify, I’m not saying that Facebook won’t continue to generate decent profits, however the valuations running around are completely unjustifiable. It’s good to see their starting to adapt to other “monetization” strategies, such as cutting up game developers for 30% of their revenue by creating a standard virtual currency.

  11. Pump and Dump schemes, as explained on Wikipedia (abridged):

    “Pump and dump schemes tend to take place either on the Internet including e-mail spam campaigns or through telemarketing from “boiler room” brokerage houses (for example, see Boiler Room).

    Often the stock promoter will claim to have “inside” information about impending news. Newsletters that purport to offer unbiased recommendations then tout the company as a “hot” stock. Messages in chat rooms and email spam urge readers to buy the stock quickly.

    Unwitting investors then purchase the stock, creating high demand and raising the price. This seemingly “real” rise in prices can entice more people to believe the hype and to buy shares as well. When the people behind the scheme sell their shares and stop promoting the stock, the price plummets, and other investors are left holding stock that is worth significantly less than what they paid for it.

    Fr**dsters frequently use this ploy with small, thinly traded companies…. ….rather than markets such as the New York Stock Exchange or NASDAQ—because it is easier to manipulate a stock when there is little or no independent information available about the company”

    Makes you think………….

  12. It may or may not be overhyped as a company, but from an investment perspective, YOU are definitely hyping it up!

    Apple’s stock before the iPod was launched was less than $10/share. In other words, it’s appreciated about 35x since then. For Facebook to achieve that kind of appreciation, they will have to be worth $1.75 TRILLION someday, which is between 5-6x what Apple is worth today as the world’s 2nd most valuable company.

    Is it possible? Sure, anything is possible. Just like bloggers writing articles that have some basis in reality. Sure, it’s possible. But not likely.

  13. Nice post, thanks for your thoughts. I’m unsure of a $50 billion valuation and the prediction that FB will continue with it’s current growth rate. I’d expect it to flatten to the degree it is add revenue dependent. The value prop to advertisers of FB’s targeting data will wear out as more businesses realize that there isn’t great ROI on this spend despite the targeting; right now the newness of it is too much to resist.

    I agree the are innovative, well led, and talented and that they’ll find another revenue stream through credits, or rev shares of 3rd party sales executed on the platform, but real valuation will need to extrapolated for that as a long term biz model. But attempts to weave advertising into the meaningful pieces of the site (beacon) haven’t gone well.

    It also may be that I am simply wrong and there’s enough ad spend from big brands that are more concerned with eyeballs than measurable ROI to sustain FB because it is very engrained in society and will stay so in some capacity for a while, especially as they grow in new markets for them like India and Indonesia.

  14. Ethan, I liked you post, but when you said “Imagine how big it will be when you do start clicking…regularly.”, I’d like you to tell me what would make me click on them actually? That’s critical. I’m not really sure I want to click some ads on FB.

    • Brilliant Pebbles

      I think that’s the real question. I’ve seen online ads for some 15 years (if you include my Prodigy account) and the number of ads I’ve clicked on could be counted on one hand. What will make a Facebook ad so special that it will do that which AOL, Geocities, and every other website fail before them? As I look at the landscape, the only company making ads really work at their valuation is Google.

      Once in a decade? How about lightning striking twice?

    • It’s a good question actually but one that I’m convinced Facebook will solve over time. No one clicked on ANY display advertising at first – now that’s $10b+ industry and Google took many years to find the best business model and ad placement such that people clicks – but without interfering with the organic search experience.

      Facebook is beginning to get this right as companies like Zynga and Zoosk demonstrate (lots of people click on their ads). I don’t have the answer but with enough rapid experimentation, I’d be shocked if they couldn’t figure it out.

    • Jack Dorsey

      I suppose his point was that ad acceptance will rise as the FB ad system will become better and increasingly personal.
      The more relevant an ad is to you, the more likely you are to submit to it, regardless of your threshold (not considering ad-blockers, etc).
      Relevance is hard to achieve if your customer data set is poor; Facebook simply doesn’t have this problem.

      The local fish store around my corner can use Facebook to advertise itself to the 3000 out of 3001 inhabitants of my village who are on Facebook. I’m not aware of any other platform that has a data set of equivalent value (provided FB upholds its market penetration).

      • Great points, Jack – and I think you clarified well what I was trying to convey. Couldn’t agree more about the data and degree of targeting; we’d be hard-pressed to find any other site with broad reach that can provide that kind of precision to its advertisers.

        Decrying internet advertising – as some are doing here in the comments – belies the fact that it’s already a big industry and growing much more quickly than any other advertising medium.

        And to Brilliant Pebbles – AOL hasn’t exactly failed to generate advertising revenue – that’s a $1b+ business for them. Sure, the dial-up business is rapidly vanishing but that’s kind of a red herring to this discussion about advertising as a viable business model. The truth is that Google’s been dependent on advertising for a long time and they are still a healthy, almost $200b market cap company.

  15. If you’re in it for the long run – the history of the world tells us you’re in deep trouble. I’d give it 5-7 years tops. They are losing the audience they started with…end if the day this is Friendster, MySpace….

    Best part is – for the paranoid, selfish, petty idea stealing loser M-Zuck is…the fall couldn’t happen to a better guy!

    I will enjoy it!

  16. Arun Agarwal

    Agreed, good post, though I think saying “it’s like Apple before the iPod” is going a bit far. Apple has gone up nearly 30X since the iPod release, and I don’t think Facebook will ever be a $1.5T market cap company. I know you don’t either, and it’s just an analogy, but my point is that I see the company as more like buying Google right after the IPO, where you get a 5X on your money if everything goes right but a ton of value has already been priced in. Still a great deal, but not necessarily “one of the best opportunities available today” — the pricing is just already too efficient. Your analysis on market size shows there has to be an upper bound here that’s a single digit multiple.

  17. Please, comparing Zuckerwhatever to Jobs is an insult to most sentient beings.
    Overpriced, overhyped.
    Zucker should have accepted the deal Jobs was trying to offer to integrate fb with iTunes.
    I know which co. will be around and profitable for longer

  18. My 14 year old daughter and her friends were talking the other day, I heard them say something like:

    “Her mom is on facebook? OMG, it’s for old people now”

    Something will replace the fad that is Facebook, and their trajectory will flatten out, or worse.

    Message to Menlo Park: There is no magic, don’t make another bubble, back legitimate companies that do something real like save people money.

    Reminds me of the movie Boiler Room.

    The reason FB reminds people of AOL is because they are very likely going to become the next AOL.

    • Spanwite

      FB it’s for old people now; that’s funny. I guess Kids move on to the next “big” thing; it’s like wearing cloth from last year. It’s just not more hip LOL.

    • RosarioM

      Myspace was a kids fad that never caught on with adults. FB is different. It may have started with kids, but now it’s used by enough adults that they can sustain the product, even if kids move on. People are uploading more pictures on FB than other photo sharing sites for example. Things like that make it difficult to just jump ship and go someplace else. I’m not saying it’s impossible, but it’s different that AOL, YAHOO and others, including Google. FB is holding a lot of our data and making it harder every day to leave. So who cares what a 14 year old thinks? FB can thrive without them.

    • Yeah – I agree 100% with this. The youth will soon jump the FB ship unless Facebook does what it should have done a long time ago. Allow users extremely easy and quick ways of choosing who can or cannot see what they publish. Each time you post a status update, photo, or comment, you should be able to quickly and easily choose what group of people will have access. If they don’t make they happen soon, the kids will flee. No kids wants their uncles, aunts, parents, grandparents, parent’s friends, etc watching them socialize online.

      • LOL! … As parents, we wanted to see what our kids were saying. We had enough embarrassing things said by our kids or to our kids and we needed to keep an eye. Any parent NEEDS to do the same, even if just to make sure no child predators or other dangers are lurking. Our house rules for facebook for our teenagers:
        1. No secrets, your parents ARE on your friends list.
        2. You post as if the whole world can see it. Because eventually they can and will. Yes, that includes stuff that ‘only’ your 500 ‘friends’ can read.
        3. FB is a time-waster, so time on it is limited.
        Now if that turns them off FB and makes them retreat to SMS’ing their friends, great!
        I am in the skeptic / what’s the big deal camp on FB’s durability as a mega-mover in technology, although I have found it useful, and its now clear that this business is the ultimate ‘network effort’ business, beyond what Ebay pulled off. The skeptic part comes in the mindset that FB is the largest site and overwhelms the other 99.9% of the internet. That’s a mystery. I mean if you are going to waste time on the internet, isn’t there stuff more exciting out there than FarmVille and tagging someone’s pics?
        Someday, people will be liberated from Facebook just like a previous generation was liberated from AOL, and they will gratefully acknowledge “So, I can be ‘social’ with my friends and be all over the internet at the same time? Huh, fancy that!” That day may never come if the gorrila uses FUD he way MSFT did to keep their mkt share, but it well might.

        That said, if Google could be a $200 billion ad-based company, why not others in that space? I find Facebook at $50 billion less absurd than Groupon at $6 billion.

    • yuvamani

      Yes facebook is/was cool and so was the ipod.

      I wanna buy Apple stock before the ipod release.

      What about you ?

      People who dismiss a technology as being cool and hence a fad are blind. They cannot see the utility. They can’t see that Facebook is a disruption to the entire internet. Facebook is a disruption to communication.

      They couldn’t see the ipods and iPhone’s significance.

      Good for them

      • disruption and significance don’t mean you will dominate forever. Surely Friendster and MySpace already demonstrated Social networking is here to stay, but any one social website can be replaced. MySpace used to be cool too.

    • Facebook was never intended to be used by your 14 year old daughter…so as your 14 year old daughter complains that a 40 year old mom is on facebook, a 20 year old college student (which the website was intended to be used for) is complaining that your 14 year old daughter is on it.