sikiliza (< 20)

It's Payback Time

January 30, 2012 – Comments (0) | RELATED TICKERS: ZNGA , GRPN , LNKD

You’ve got to love a company that takes your vanity, your voyeuristic and wanna-be tendencies and turns them into cold, hard cash. And that in a few short years, during an economic recession.

I love the business

Some estimates put FB’s net income for 2011 at $1.5B, a 39% margin, which would be higher than any net margin that Google has made since its IPO in 2004. As you spend your day “Liking”, “Friending”, sharing photos/videos and reading status updates, Facebook is quietly making money, so much so that it now commands almost 20% of the Display Advertising market.

Your value to Facebook

Assuming a $100B valuation for Facebook, your long time value as a user equates to an average $100B/400M - $62.50, assuming that only 50% of user are actually active on the site. That said, you generated only $1.5B/400M - $3.75 in profits for the site in 2011 meaning FB needs for you to stay on the site for at least the next 10-15 years to extract your full value.

FB has some great opportunities ahead

Keeping in mind Terry Semel's (Yahoo) huge blunder when he turned down the opportunity to buy Google for $5B in 2002 because he did not see potential, I believe that there are still huge growth opportunities open to FB:

Video: FB has recently been talks with Vevo to be the exclusive host of Vevo’s music collection. Vevo’s contract with Google expires in one year’s time and if they was to move over to FB (which their greed might cause them to), YouTube would be dead. Why? All music on the site including all those personal videos with background tracks would have to be taken down/muted (for copyright reasons) and with music comprising 40-50% of traffic site, that would be the end of that, heralding the entry of Facebook as the top video destination. Revenue potential - $200M-$400M in year 1 alone.

Music – The agreement with Spotify has yet to show results. Revenue potential is about $50M-100M with the ability to stump Pandora’s growth potential.

Games: The likes of Electronic Arts and Sony will sooner or later have to embrace the Zynga model or die a slow, painful death trying to do their thing outside the social sphere. Game Syndication is King and Angry Birds has clearly demonstrated that. FB made about $470M in revenues from Facebook Credits in 2011, most of which consists of in-game purchases. This could easily quadruple in the next couple of years with additional gaming offerings.  

Yahoo: If Yahoo continues to underperform, a generous chunk of their display advertising market share will move over to FB.

Scale, however, may be a problem

The one thing that troubles me is the fact that the company may have reached critical mass. With over 800MM users (including pets, dead celebrities, bands, company brands etc), FB already has 38% of total internet users (estimated at 2.1B) or 1 in every 9 people on the entire planet. In addition, eMarketer estimates that FB will command 20% of the Display Advertising market in 2012, ahead of Yahoo and Google. How much more, then, can the company grow in terms of market share and user acquisition?

Valuation may be on the high end of the scale

At a $75B-$100B valuation and 2011 revenues of $3.8B, FB would carry a Price/Sales ratio of 19-26 compared to Google’s 4.97 and Baidu’s 23.27. To put matters in perspective, when Google went IPO in 2004, it had made $1.47B in revenues the previous year and was valued at $23B, giving it a P/S of 15.65. Baidu carried a 125 P/S at IPO in August of 2005. Well, maybe, FB will not be as overpriced as most people think as it seems well within the GOOG-BIDU range.

Finally, as a retail investor, I would probably be a bag holder for the early comers

True, the FB IPO will blow up as everyone and their dog is looking to own a piece of the one website that takes up all their productive time. That said, since few retail investors will be able to get in on the IPO price, the real winners will of course be the early birds and founders (employees will likely be on lockout)

The most recent ownership percentages comprise:

1.     Mark Zuckerberg: 24%

2.     Digital Sky Technologies: 10%

3.     Accel Partners: 8%

4.     Dustin Moskovitz: 6%

5.     Eduardo Saverin: 5%

6.     Sean Parker: 4%

7.     Goldman Sachs & clients: 3.8%

8.     Peter Thiel: 3%

9.     Meritech Capital Partners1.6%

10.  Greylock Partners: 1.4%

11.  Microsoft: 1.3%

12.  Li Ka-shing: 0.75%

The remaining 30% or so is owned by employees, an undisclosed number of celebrities (including Bono at Elevation Partners), and outside investors.

I can only look to trading the stock in the first day or so and maybe earning back some of that time that I lost on Facebook when I was a prolific user and looking to be at the top of the Mafia War rankings. Morgan Stanley, the lead underwriter on the deal, is bound to make sure that I don't profit more than its customers do.

It’s my birthday today and although I miss all those creative birthday cards and messages when I was a user, I still think that there is some real value here.

Additional Info 

Some Interesting FB Metrics

User Metrics

·         800M registered users with an average 130 friends each

·         92% of Social Network users are on Facebook vs. 13% on Twitter

·         52% of Facebook users and 33% of Twitter users engage with the platform daily

·         15% of Facebook users update their own status.

·         22% comment on another’s post or status.

·         20% comment on another user’s photos.

·         26% “Like” another user’s content.

·         10% send another user a private message

·         Average age of adult users has shifted from 33 in 2008 to 38 in 2010

·         Women made up 56% of social networking site users 

·         Over 700 Billion minutes a month are spent on Facebook with 1 Trillion pages visited

·         70% of the User base is outside the US

·         Average user has 130 friends