February 8th, 2012 by Lloyd Gofton
The piece, written by Frédéric Filloux compared Facebook’s valuation 3 years ago, with its valuation now and pulled up some interesting data on its profit and value per user, then compared this to other social and traditional media.
The article set the scene with a snapshot of a Marc Andreessen interview, from February 2009, who was the creator of Netscape and a Facebook board member. At that time, the social network had 175 million users and Microsoft had just made an investment setting Facebook’s valuation at $15bn.
Andreessen was quoted on the vision for Facebook, saying: “6 billion people on the planet. Probably 3 billion of them with modern electricity and maybe telephones. So maybe the total addressable market today is 3 billion people. 175 million to 3 billion is a big challenge. A big opportunity.”
I’m sure there were a few raised eyebrows in 2009, but perhaps his statement is a little more believable today, although there are other issues such as strong competition in key markets, the member opportunity is indeed there.
Fast forward to last year (2011) when Andreessen was quoted commenting on Facebook’s funding ($1.3bn as of January 2011). Andreessen said the whole amount was actually a shrewd investment as it translated into an acquisition cost of “one or two dollars per user” ($1.53), which sounded perfectly acceptable to him.
As Filloux mentions in the article, if you look at Facebook’s pre-iPO filing: Marc Andreessen was right both in 2009 and in 2011.
So why the title of ‘Facebook’s strange economics?‘ Well, this is where it gets interesting.
As Filloux points out, last year, each of the 845 million active members on Facebook brought in $4.39 in revenue and $1.18 in net income. He also pointed out that based on the $3.9bn in cash and marketable securities on Facebook’s balance sheet, each of these users actually generated a cash input of $1.53 dollars.
The article then suggests the expected market value for each user after the IPO, which is based on the $100bn valuation, comes out at a value of $118 per user.
Filloux then goes on to compare this to other social networks and more traditional media.
Looking at LinkedIn, which is obviously more specialised than Facebook, and has about 145 million users, it has a $7.7bn market cap and a value of $57 per user. However, LinkedIn makes $3.5 in revenue and $0.78 in profit.
The New York Times, until recently the most read online newspaper in the world, is a less straight forward case, as Filloux notes, simply because the company has numerous websites that deal with domestic and global users as well as traditional readers of multiple hardcopy titles.
Filloux suggested a figure of 50 million people worldwide who are in regular contact with one of NYT’s titles. Based on today’s $1.14bn market cap, this yields a valuation of $23 per NYT customer, five times less than Facebook.
However, there is a large anomaly because in 2011, each NYT customer brought $46 in revenue, almost 10 times more than Facebook. As for the profit ($56m for the NYT), each customer brought in a little more than a dollar.
Looking at traditional media company Gannett, Filloux noted it makes between $50 and $80 per year in revenue per customer, and, depending on the way you estimate it, the market values that customer at about $50.
This means Facebook or LinkedIn are flying high while traditional media are struggling; when Facebook achieves a 47% profit margin, Gannett or News Corp are in the 10% range.
This in no surprise in terms of the way social media are over taking traditional media, but the value per user is much lower. 10 times lower in fact, but the market values these users up to five times more.
Bringing this in to context, Facebook looks set to offer shares a multiple of 100 times its earning and 25 times its revenue. Apple is worth 13 times its earnings and Google 20 times. These kinds of figures do not tend to stand the test of time very well when the market matures, so beware of the Facebook Bubble as Filloux puts it.
The article offers real clarity on what has been one of the most dramatic valuations since the dotcom boom. Facebook’s success is undeniable and its meteoric rise to success/power is there for all to see, but surely the valuation is generous to a fault. Or too generous not to fault.
I have no doubt Facebook’s IPO will be a massive success, and the future of the organisation is bright, but why do we need to make a success story into a super success with falsely inflated valuations, when the real story is still pretty damn impressive?