Goldman docs: Facebook income $355m, revenue $1.2bn (first 9 months of 2010)
reuters.com
reuters.com
"Facebook earned $355 million in net income in the first nine months of 2010 on revenue of $1.2 billion, according to documents that Goldman Sachs is providing to clients.
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The Goldman customer said he received a separate six-page financial statement containing information on the social networking firm.
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The financial statements were not audited and offered little detail about how Facebook generates it revenue, said the source, who did not want to be identified because he had signed a non-disclosure agreement."
Or he asked his friend, "hey, can I see your document... yup, they're identical" and then leaked with impunity. If the public really wants something, and you send a document with that information on it to a bunch of people, it's going to be leaked. I think Goldman is smart enough to realize this; the buzz is helping their business, but they knew they would get in trouble if they just announced the numbers. So they just gave it to random people with a I-did-my-due-diligence-NDA and let entropy take care of the rest.
I'm not sure I can buy that, at least not at that price.
(Or, more accurately, a bet that enough other people will think so for long enough that you can unload your stock on them for a profit. I wouldn't buy and hold, I don't think.)
While I think most people expect Facebook traffic to continue to grow for a while yet, it should also be clear that their moneterization efforts are pretty still primitive.
For example, did you know it's possible to get > 50% cheaper advertising on Facebook by selecting CPM rather CPC when you build your ads?
Even ignoring that, in my experiments advertising on Facebook is still hugely cheaper than on Google (taking the cost of a customer from acquisition to fulfillment). In any mildly competitive market (like online selling) that difference doesn't seem likely to continue.
Anyway, my point is that I think that while "completely taking over the internet" may be crazy, there are plenty of ways for Facebook to easily grow their revenue by huge factors.
Facebook's basic play is to build a lot of value into their network by bringing as many people in as possible, make some pocket change in the process, then eventually figure out how to milk the surplus value which will certainly be a large amount of value. My skepticism lies mostly in the execution of that second step; I'm totally unconvinced there's an ad bonanza large enough to fund this. Maybe there is. I think somebody's going to actually have to sell something and it's not clear to me what will work on the promised scale. That or they're going to have to raise the barrier of entry and if they do that they'll trigger the open internet competition in a heartbeat, competition already coming together and will be ready to go when that happens. The act of squeezing the surplus value of the network is the exact same act that will create their decentralized open competition.
But hey, who knows. Sometimes you get MySpace, sometimes you get Google. You tend to only be able to definitely tell them apart in hindsight.
It's pretty easy. You can select your target audience by gender, location, age group, and interest(s), and then select if you want to pay per impression or per click.
It is a good system (just as easy to use as Google's) and it gives good results. I've tried it, and that's why I'm bullish on them.
(It's worth noting that advertising has funded newspapers for hundreds of years, television for 50 years, and Google for 10 years and is proven to work in those cases. I shouldn't have to say it, but apparently some people continue to doubt that advertising is a reasonable funding model at all, regardless of the specifics of Facebook)
Another way to look at it: Do you think Yahoo or Facebook is more relevant to the average user, and what is the trend for each one, and what is the likely trend for advertising spend on each platform? (Note that Yahoo is currently worth $22 billion)
Basically, I think there expectations aren't as unreasonable as the large numbers seem to imply.
I want to jump up and down and yell "bubble" as much as the next guy, but I do have to admit this one seems relatively focused... at least at the moment. Just a small handful of companies trading way above what they "should" from a buy-and-hold perspective.
Some possible risks:
* Orkut-like sites were around for a long time, now nobody uses them today. People shifted to facebook and may move elsewhere.
* It is possible that a decentralized, autonomous solution may come up for social profiles.
* The fact that the company is not mature is a double-edged sword, a new idea or feature may come up that may well make facebook a less attractive place to be.
1) Grow at a crazy rate (which I doubt they can)
2) Increase their revenue with the existing userbase (which they can do, but not at 5X)
They can also reduce their spending, but that alone will not take them to a reasonable P/E.
Basically, their valuation should be at 15-20 billion, at best.
Let's see if the $50B valuation is as outrageous as many seem to think. :)
Projecting earnings to $500m for 2010 gives them a P/E of 100.
I agree that a P/E of ~100 is high for a mature company: GOOG is ~24, YHOO is ~22, AMZN is ~75, EBAY is ~14.
Obviously Facebook isn't a mature company at the moment, though, but what their earnings would have to be to keep the $50B valuation with a P/E of 30? $1.66B
Earnings of $1.6B is a lot of money, but Yahoo had earnings of $1.4B last year, and I don't think it's unreasonable to expect that Facebook will be earning more than Yahoo within a couple of years.
Mature in terms of what? They are a 7 year old company with 500 Million users and 3000 top tier workers.
"I don't think it's unreasonable to expect that Facebook will be earning more than Yahoo within a couple of years."
With that logic, I don't see why Yahoo can't earn more than Google within a couple of years. All they need to do is to 'focus on monetizing', just like Facebook can (if they only put their mind to it).
Anecdote: Google converts 15X more than Facebook in my circle of peers that have used both.
Facebook can improve monetization hugely and they're clearly working on it.
Look at how the new profiles encourages people to list employer and job title, Facebook have learnt from Linkedin that allowing advertisers to target by job/industry is hugely valuable. They're going steal a hugely valuable ad market from Linkedin.
Furthermore local advertising on Facebook is vastly under-utilized, there's a whole cottage industry springing up of local affiliate firms who act as brokers buying ads from Facebook and selling leads to local firms.
"Furthermore local advertising on Facebook is vastly under-utilized" If we both already agree that search converts better than social ads, why would local advertisers switch from Google to Facebook? If it's only about price, Google can undercut Facebook in an instant.
EDIT: If anything, the recent attempt to add job/career to profile page for Facebook smacks of desperation. Like trying to go after an established market.
Right now on my Facebook page I have two professional ads (one for a CRM system and one for a business IT news site) and two Facebook game ads.
On top of that Linkedin is truly awful when it comes to targeting. Their job categories are ridiculously broad, if you want to target Software Engineers or Aero Engineers, you can't. Instead you have to target "IT" and "Engineering" - categorizations which combine together barely related roles.
It would be very easy for Facebook to offer more precise targeting, that alone would be a killer feature over Linkedin.
Search has a higher CTR but not a higher eCPA, a well designed Facebook ad can convert much more cheaply than buying targeted keywords, you'll need to buy many more ads, but the end cost is what matter.
(Incidentally most local companies don't advertise online at all, it's not a case of stealing customers from Google, etc. but rather a case of persuading them that it's worthwhile. Hence the rise of local ad brokers who buy CPM and sell CPA, as it's much easier to convince a local business to advertise through you if they don't have to pay you until after you generate business).
As far as cost for ads is concerned, I don't think Facebook stands a chance. Google can undercut Facebook anytime with their 30 billion dollar cash reserve.
I currently buy ads at Google, Facebook, Linkedin and PlentyOfFish. Find me another source of effective advertising and I'll advertise there too.
Unless your margins are razor thin and you have tiny volumes, it seems unlikely that the extra time you have to spend managing your ad campaigns would justify not using them. After all just because the CTR of Facebook is smaller than Google it doesn't mean you have to invest more time into it because your ad has to be seen 100x more often to get the same CTR.
Google has a lock on the (incredibly profitable) search advertising market. For Yahoo to match that they would have to increase their search market share (as well as improve their monetization of it).
That's a much harder problem than matching Yahoo's revenue. As far as I know, most of Yahoo's advertising revenue is display based, and the money made from that is basically a factor of page views.
Anecdote: Google converts 15X more than Facebook in my circle of peers that have used both.
Converts what? Sales? If that's the case then it doesn't surprise me (search advertising is incredibly efficient). But what you might find surprising is that I find you can get Facebook advertising for less than 1/15th of the price of the equivalent Google ad (by choosing CPM instead of CPC ads).
Source: http://www.bloomberg.com/news/2011-01-07/goldman-efforts-to-...
Current valuation on SecondMarket = $50 billion
$50 billion/$1.6 Billion = a 31.25 multiple.
5 to 10 times revenues seems to be a reasonable way to value startups/private companies nowadays (for the most part). But a multiple of 31.25? Wow.
Dividend yield is probably 0%, too, so if that's what one is after, it would seem like a crappy deal.
Let's assume they grow to five times their current income over the next five years; and, ooh, I am busy - just multiply the previous number by five to get an approximation.
Facebook's financials are nice, but I'd really like to see their usage and growth statistics, broken down by country. I don't think they can count on growth for much longer; they're going to have to monetize better. They're trying to do that by developing facebook as a platform, but the future in that regard is far from certain.
Google's P/E is ridiculous, but they have solid profits from ads and they're expanding hugely in mobile. Google's growth can be expected to continue, at least for the foreseeable future. I don't think we can say the same of Facebook with any degree of certainty.
Google's P/E is around 25 which I think is reasonable for a company that a) has been growing earnings on average 20% per year for the last 3 years; and b) Is sitting on a big pile of cash worth about 15% of its market value.
(Disclosure: I own google shares)
The US is the largest, richest single market in the world, with the possible exception of China/India. Those markets, however, are undeveloped.
Facebook is quickly becoming the next Myspace. By leveraging it as a platform, they're ceding control on UX. People left Myspace because most pages were ugly and blared shitty music at you. I can't count how many "friends" I've removed for sending farmville and mobwars invitations, or having astrology crap automatically posted to my news feed, or, or, or...
Facebook is facing a position where monetization means shrinking its social graph, which isn't particularly enviable for the King of Social.
Add in an unpredictable future growth rate. Add in the fact that they're probably approaching a hard cap on users in the next year or so. Add in bubble-ishness. Add in a big unknown as to whether they find ways to better monetize their users. And all this adds up to telling me either this is a bad investment, or, maybe just maybe it will at least break even within your lifetime. Can't say. But from this data I think it is not clear that this is a slam dunk buy at all. Either bad or meh.
There was a bunch of other stuff like this discussed in the threads on the goldman investment itself.
but yeah, anything can happen, and there are lots of factors involve.