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My Pending Facebook Red Thumb

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February 26, 2012 – Comments (0) | RELATED TICKERS: YHOO , GOOGL

I've done very well in CAPS so far betting on the big picture and discrepancies between common perceptions and reality. I'm looking to add some serious points red thumbing a $100B market cap Yahoo-2 in the making. Here's the scoop, they apparently did ~$3.71B in revenues in 2011 and had some sort of profit of ~$1B. At a market cap of $100B that would put their P/E at 100 and P/S at 27.

You can put my red thumb thesis for Facebook in two words: Banner Ads????????? I've got news for the future bag holders of Facebook common stock, banner ads is not a new business model it's quite well established at this point and apparently Facebook is not even all that successful at converting ads to sales for their customers. According to their Wikipedia page as of Feb 2012 the click through rate for Facebook ads was a paltry 0.04% or 1/5 of the web as a whole (2%) and 1/200 of Googles 8% click through rate.

Anybody who thinks this is the next Google is going to be sadly mistaken. This is the next Yahoo. Googles genius is in helping people who are looking to make a purchase find their products. Services like Yahoo and Facebook have to try to sell something to people who are only interested in cheap entertainment on the web. I seriously doubt that Facebook is going to expand total dollars spent on banner ads which I would imagine is fairly well established at this point. So they are probably in a zero sum game with Yahoo and other services reliant on banner ad sales where there success has probably been at Yahoo and others expense.

With Yahoo maxing out at ~$7B in revenues and less than $1B in net income a few years ago that's probably about Facebooks upside. I could easily see Facebook stagnated at $6B or so a year revenues with $0.7B net income trading for 15X net income or ~$10B market cap five years or so from now. Given I'm also bullish on the U.S. economy and the markets in general that would translate to a healthy CAPS gain for my red thumb.

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