Why Facebook isn't worth $100 billion or anything close to it...

DislikeNOTE: I wrote this article before the IPO numbers became public so please keep that in mind. I keep coming across articles indicating that the fraudulent sacks of shit on Wall St. are trying to value Facebook at $100 billion. The absurdity of this valuation should be painfully obvious to anyone who takes even a cursory look at the numbers. The mathematics are simple enough even for small children to understand.

Let’s look at some key statistics about Facebook:

Users: Over 900 million
2009 Revenue: $777 million
2009 Net Income: Unknown
2010 Revenue: $1.97 billion
2010 Net Income: Unknown
2011 Revenue: $3.8 billion
2011 Net Income: Unknown
Q1 2012 Revenue: $1 billion
Q1 2012 Net Income: Unknown

Last year Facebook had $3.8 billion in revenue, not profit, just revenue. We don’t know how profitable Facebook is because it’s still a private company. Let’s say Facebook’s executive team is absolutely stellar and they have even better margins than Google with 27.5% (Google achieved 25.7% profit margin in 2011). That would mean they earned $1.045 billion in profit which would imply a P/E ratio of 95.7 and a return of only a little over 1% on your investment. That’s a pretty bad investment which does not even begin to keep pace with inflation.

“But Facebook is a growth investment” you might say. Maybe so but how much growth can possibly be expected with 900 million users already, or to put it another way, nearly half of the 2.3 billion total estimated internet users? Sure the internet will continue to attract new users, and at a rapid rate for but how many of those new users will be from the developing world where they have limited access to the internet? Clearly not all users are created equal. Facebook’s bread and butter are the fat, lazy, dumbfuck Americans and other Westerners who stare blankly at their Facebook news feed for hours per day like the fat people in the movie WALL-E. In reality, nearly everyone in the developed world (except China) is already on Facebook, and a larger and larger proportion of prospective Facebook users are most definitely going to be the kind that only have only occasional access through an internet cafe or perhaps the one computer in the village powered by Ogundo Matumbu riding a bicycle behind the mud hut that serves as the village data center to power it. How much revenue will those kind of users produce? But what the hell, let’s just give them another huge benefit of the doubt and assume each user produces an equal amount of revenue for Facebook. Google’s P/E ratio right now is 18.31, as discussed above. Giving Facebook a huge benefit of the doubt that their profit margins are even better than Google’s, their implied P/E with a $100 billion valuation is almost 96.

In order to achieve an 18.31 P/E ratio (in line with Google, which I think is a much better company by the way) holding the $100 billion valuation constant, Facebook will need to increase their revenues and hypothetical net income by more than 500% to $19.86 billion and $5.46 billion respectively. I don’t think it’s realistic that Facebook can increase their revenues and net income by 500% within a reasonable period of time either through growth in users or trough generating significantly more revenue per user. And this is just what’s necessary to justify Facebook’s opening IPO price if you think the company should have a comparable valuation to Google – this does not provide any appreciation on your initial investment. What about the time value of your money?

Now let’s do some simple middle school math (and by that I mean the kind of math they do in 1st grade outside the Western world). Let’s round things off to make the numbers easy… if Facebook made $1 billion profit with 900 million users that means each year, each user earns Facebook roughly $1.11 on average. We know that to achieve an 18.31 P/E Facebook would need $5.46 billion in earnings, so we can divide that $5.46 billion by $1.11 to come up with the number of users required to generate this income target. We come up with 4.92 billion users… or, in other words, more than two times the total number of users estimated to be on the internet today. Woops, clearly that’s not going to work… Maybe they could double their revenue per user and double their number of users… that would get them just 73% of the way to our revenue and profit targets though… bummer, dudes.

I don’t think Facebook is analogous to Google anyway. Google is an innovator constantly introducing new products and services as well as making improvements to old ones. Google develops new products in-house but also makes intelligent acquisitions such as Youtube. What major acquisitions has Facebook made that have been real grand slams? $1 billion for Instagram? You have got to be kidding me. This reminds one of the dot-com bubble where obscene amounts of venture capital were wasted on such abominations as Pets.com and Boo.com.

I see Facebook as being more analogous to MySpace than to Google. Facebook isn’t an innovator. They’re not branching out into other businesses in a meaningful way. They don’t stay ahead of the curve, they make just the bare minimum of changes necessary to hold their position along with a lot of superficial cosmetic changes that don’t offer much if any additional functionality. Where the hell is that dislike button for example? Sometimes the changes they make are for the worse. Rather than being on the cutting edge of new technologies Facebook simply copies the ideas of others and often so poorly that it leaves a niche for other apps to thrive in. Foursquare is an excellent example. Facebook has a check in feature – what do we need Foursquare for? Why the hell do we need Twitter? Isn’t that just like Facebook with no features except the status message?

Speaking of Facebook’s lack of innovation and need for additional revenues to justify their outlandish $100 billion valuation, you’d think they might have done something obvious, like, I don’t know… perhaps putting advertising on the iPad, iPhone and Android apps? You’d think so but you’d be wrong. You would think that would be a no-brainer. And why exactly are they not working day and night on fixing this? How long can it take to throw some ads in there? With over 100 million “iDevices” in the world along with many others running Android that seems like a great way to add some additional revenue, don’t you think? I’m sure they will add this eventually but what does it say about the people running this company that they’ve let this slide for so many years already? Don’t they like making money at Facebook?

While on the topic of Facebook advertising, I would be remiss not to mention Facebook’s abysmally low click through rates (CTRs) and the fact that Twitter crushes Facebook in this arena in yet another of example of how Facebook is behind the curve compared to its peers. This article even claims that Facebook’s CTRs are worse than “regular online banner ads” – how often to you click on those things? Maybe it’s because despite the plethora of information Facebook has on its users, they still do a shitty job of targeting the ads – this has certainly been my experience anyway, I don’t even click on one ad per week and when I do I usually bounce off the site immediately because whatever it was was junk I’m not interested in.

The best part (or the worst part if you’re actually considering buying into this farce) is that Facebook has already paved the way for the next Facebook, whatever it may be, to steal their users in droves. The “Facebook Connect” feature allows developers of other sites and services to offer one click signup and login for Facebook users as well as to export all kinds of personal information and even photographs. Whenever the next Facebook is developed, won’t “Facebook Connect” be a great way to signup for it? It’s only a matter of time. Facebook is not Google and unless they become Google they will go the way of MySpace sooner or later.

But of course on Friday, there will be a mass IPO hysteria and all sorts of retards will bid the stock up to ridiculous levels, and yes, Facebook will reach and probably exceed that $100 billion valuation. Then I will wait impatiently for a week or two for people to write some puts. On a long enough timeline, I guarantee you, Facebook is a losing investment and I can’t wait to take the other side of that bet.

UPDATE: Shortly after I finished writing this article I noticed this headline: “GM Doesn’t “Like” Facebook, Drops Ads“. LOL! More good news for Facebook and the schmucks planning to dump their life savings into it!

UPDATE 2: According to this article, my hypothetical $1.045 billion in net income turned out to be the actual figure for 2011. Since the IPO price is turning out to be $104 billion that means the P/E is over 100. Q1 2012 does not look promising with only $205 million in net income… I can’t wait for those puts!

Zerohedge commenter Blizzard_Esq posted the following:

Facebook’s revenue per USA user (157 million users) is about $13.37 in 2011.
Facebook’s revenue per Foreign user (733 million users) is about $2.21 in 2011.

This seems to confirm my hypothesis that new users are going to be far less profitable than the fat ass, lazy westerners… Can anyone back up these numbers? I could not find a source.

UPDATE 3: Hilarious… the underwriters had to step in to prop up the stock price above $38.

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42 comments to Why Facebook isn’t worth $100 billion or anything close to it…

  • Anything But Ask.

    I knew that facebook was a pump and dump scheme well before its public launch. However the real value of facebook should have been around the $20 – $50 million dollar mark. However, greed always seems to get the better of everyone. I knew enough back then to have been able to short the stock. I wish I did. I would have made myself a millionaire!!

  • kangaroo_trader

    fuk facebook

  • When rumors surfaced about a year ago about FB going public and then Mark Z. denied the rumors, I was intrigued and started to follow. When it was officially annouced that they would be going public, the first thing that popped into my head was “They are dumping the company” The US user base is decreasing drastically and lets face it, americans are the main target for advertisers we buy everything – even crap we don’t need. They claim to have over 955 million active users (which is false) people have to take into account all the double & triple accounts held by one user (I’m one of them) and I don’t go on FB anymore, it’s so lame. ok..ok.. I digress.
    Mark Z. is not that smart, he and FB got this far because of investors and their millions and in the end investors want back more then they put in, the goal to get as much as they can before a company tanks.
    Mark Z. may not think or want his baby to tank, but the investors have final say & they know better than him when it’s time to jump ship. There is no really big future for fb
    It’s a known fact that serious investors will not invest in a company unless there is an exit strategy which means either the sale of the company or going public. Usually the last step for a large company that has no means of revenue, doesn’t offer anything of substance and is losing popularity in the u.s. market would be sale or go public, this way the big guys can get as much $$$$$ as possible and walk away leaving Mark Z. and all the schmucks who purchased from the insiders that got first dibs holding the bag.

    If this company tanks within a year, you know there will be additional lawsuits and investigations into insider trading and fraud and like I said it will all fall on Mark Z. He will be alone.

  • tony

    If I were an advertiser knowing that FB has 900 million users and 900 million e-mail addressess, then FB is the best medium for me to reach those 900 million souls. What say you Mark???

  • ToddG

    An article by Coventry League’s blogentary titled ‘Facebook: An IPO Investment Timeline’ suggests that FB still would be grossly overvalued at $22 per share. It has a nice Myspace chart comparison too.

    • The more I dig into it the less I think it’s worth. My current guestimate is between $5-9 per share. For sure it is worth less than $18 billion because at that price, even if Facebook made sense as in investment in a vacuum, Google is a better buy in the real world… how much less remains to be seen.

  • david

    Manuel, well done dude! exposing YET ANOTHER Wall street scam… insiders lining their pockets with money before jumping ship… the game is so simple and it is repeated every time…the only issue is that the average “joe” is so naive and good thinking (stupid?) that they would NEVER expect anyone to do such a thing..so lets watch this space and see how the stock price develops as the share holders realize the shit they are in and start to dump it. last one out turns the lights off :-) anyway once again, well done for calling a spade a spade!

  • james

    Maybe some of you think we Americans are lazy whatever! Most Americans work hard and most of us do ntot care about facebook, so before you run your mouth about my country, think about your own country and pig wallowing that your own countrymen do and how you all treat your own people! Piece of shit who wrote those atricles needs a slap!

  • kahn

    Very good article, love it. Thanks

  • Cliff

    But now that they HAVE more money than every player in every professional sport combined… don’t these clever kids have the resources to make FB anything they want it to be (or need it to be as far as their investors are concerned?). On the one hand they could take the money and run… on the other hand fame, bragging rights and greater power have driven many a rich man to push for more, bigger, better, etc.

    In a nutshell what I’m saying is everyone here seems to be pointing out that they did much with little to date (even going so far as to say “I could have done that”.) My point is, now that they have MUCH, what can or will they do with that?? Seems to me everyone is overlooking the POTENTIAL!

    • Sorry Cliff but I take serious issue with your argument here. Why? Going into this IPO Facebook had $3.9 billion in cash and short term investments plus another $550 million in AR on the books. As for debt (a paltry $677 million) and total liabilities ($1.4 billion) there aren’t any big problems there considering the kind of cash they have on hand. The had nearly $4 billion in revenue in 2011 and they made a handy $1 billion in profit. In other words, as long as Facebook could just match last years performance, let alone improve upon it they wouldn’t be hurting for cash by any stretch of the imagination. What’s more, Google, a much more mature company, with twice the market cap and fully ten times the revenue and earnings, only spent $5.2 billion in R&D. Facbook could easily spend half that or perhaps more without doing an IPO – are you suggesting they should need to spend more than 50% of the R&D budget of a company doing 10 times the amount of business with innumerable more products and services in order to compete or to pull off the “next big thing”?

      All that aside it seems like all it takes is a couple bright kids with some laptops and a $0 budget to invent “the next big thing” in this space. Lack of money is clearly not Facebook’s problem when it comes to innovation and their next big product / service.

  • dura47

    i pity does investing in this sham. stock trading is a sham. now you know how this is done ? some intellectual idiots sit in their offices, drink coffee and start making crazy analysis on the potentials of a business that does nothing and finally they publish those analysis in the market place searching for lazy people who don’t know what to do with their money. finally they get, they move to the stock market and the bidding process starts based on the analysis on the potentials the business has. that was happened before the economic crisis, at the end the greedy falls, like nigerians would say (maga don fall). suddenly, it turns out that the business is not doing so well and is losing money, the shares loses value and sorry for the ordinary share holders. FRAUD is real beware and save your selves from another economic crash, this time people would runaway from their homes and seek refuge under the rain..

  • Scot

    Facebook is currently worth more than Ford or Pepsi. Anybody with a degree in Computer Science could write the code for Facebook in less than a month, I know I could. clearly there is something wrong here, the stock is well over valued.

    • I think writing the code as it currently stands in less than a month is quite a stretch – Facebook likely contains millions of lines of code as it stands today… however the original Facebook for sure, maybe even in less than a week!

  • jeffy14

    To decrease your P/E you can increase your earnings (as you explained) OR decrease the Price OR do both
    Why you only talk about increasing by 500%?

  • Lucifer

    I see 82 likes, 12 tweets and 1 google plus (i clicked on it!)

    So, i don’t know….

    But i do know the url: http://www.singledudetravel.com/2012/05/why-facebook-isnt-worth-100-billion-or-anything-close-to-it/

    from the picture… so they know im reading this….

    But: making money out of it is is a other AI / datamining buziness.

    I don’t know if they watch google tech talks !!

    http://www.youtube.com/watch?v=AyzOUbkUf3M

    The Next Generation of Neural Networks – YouTube

  • And, after 1 day of trading, Facebook is now worth 105.19 billion dollars!

  • Sebastian

    . . . What do you think is Facebook’s real market value?

    • I don’t have an exact figure in mind because there are too many unknowns but what I would say for sure is that they certainly shouldn’t be valued more than Google relative to earnings. So this means $18 billion or less. I’m not saying Facebook can’t pull off some Amazing hat trick and grow incredibly just that I think Google’s prospects for continued wild fire growth are better than Facebook’s therefore I would never pay as much or more for $1 of Facebook earnings as I would for Google’s.

  • This person takes the words out of mouth.

  • Great article!

    One thing that I really hate is when other websites only have a Facebook login function. I have encountered a couple of good sites that I would like to join but then it says something like “This site will get access to your personal information, name of your friends, your status updates etc”.

    Well after reading that I don’t join that site no matter how good it is.

    And I can testify that buying ads on Facebook is totally worthless. Not a single user will click on your ad.

    • Pjotr

      The biggest horrible example is Spotify! You can no longer join Spotify and even pay to use it without creating a Facebook account!

    • diego

      you’re wrong about the effectiveness of facebook advertising.
      i was able to very quickly acquire a large number of valuable users (people who paid >5$ to participate in my advertised platform)

      maybe your efforts were less than ideal and yielded poor results.
      don’t blame the platform.

    • Incomplet

      Well, if you’re concerned about privacy, google/yahoo/insert_your_social_media_here will sell your soul for a dollar any day of the week. Both to advertisers and the government. Facebook isn’t really special in that regard, they’re just less sneaky about it.

      • No arguments there… for sure none of the big .com’s are angels when it comes to protecting user’s privacy. Although I have read some pretty convincing information about Facebook having direct ties to the CIA. With the data center big brother is building in Utah I don’t think it much matters whether or not any given company cooperates with the government or not, “they” will know. http://www.wired.com/threatlevel/2012/03/ff_nsadatacenter/all/1

        • dag mastr

          Yeah their not building that huge data storage center in Utah for the hell of it. Privacy on the internet, fax or telephone does not exist any longer. The only thing close to a secure way to communicate is with pen and paper via the postal system. From what I’ve read new cars are also going to be outfitted with electronic tracking devices among other things as well. If that were not enough there are highly sophisticated recon drones flying around just in case they don’t feel that they have enough data on you already. Oh yeah no warrant needed.

  • This is such a great article. Spot on. Fundamentally Facebook is nothing like Google, which is why they’ll collapse underneath their own weight sooner or later. They have the worst CTR of anybody and no serious method of monetizing. They’ve basically created a useful technology, failed to monetize it properly, and made it insanely easy to be copied/replicated/replaced by the next social media fad.

    This article was awesome, and thanks for using numbers we Westerners can comprehend, ahaha.

  • Kevin

    When is MySpace’s IPO?

    I wanna get in on that cash cow

  • I totally agree with this. This IPO will make a huge amount of money for the funds, traders and anyone on Wallstreet. But, for anyone thinking of adding this stock to their portfolio, they will lose their ass.
    I think the smart money, in the long run, is puts on FB stock.
    People seem to forget all the other huge IPO’s that never made the expected P/E. Friendster, MySpace, Yahoo, Napster, etc. IPO’s of any social media is a bad play.

  • The only point I know how to make on this topic is an obvious one:

    Myspace was cooked up for cheap by some hungry ambitious geniuses for no money.

    And then…

    Facebook was cooked up for cheap by some hungry ambitious geniuses for no money, replacing Myspace.

    And then…

    ________ was cooked up for cheap by some hungry ambitious geniuses for no money, replacing Facebook.

    Duh.

    There have been so many _____’s in the very RECENT past that I can’t even remember them all. Here are some, and I ask that others help me fill out the list:

    Done:
    o Lycos
    o Excite
    o Yahoo
    o Myspace
    o _____
    o _____
    o _____

    Still going at present:
    o Google/YouTube
    o Linkedin
    o Twitter
    o Facebook
    o Microsoft/Skype
    o _____
    o _____
    o _____

    Ain’t NO way I’m playing that game.

  • Paul Murray

    What hardware does facebook own? Routers? Cable-in-the-ground? That sort of thing.

    The big, big, big potential money for FB is the fact that they are a global identity provider. “Connect using your facebook id” is where the bucks are. But they need to figure out a awy to make people pay for it withour frightening them off.

    • Well I think we all know that IT hardware depreciates faster than an ice cube on a beach without a cooler. Furthermore I don’t think it’s realistic to get people to pay for “Connect using your Facebook ID” – there are tons of competitors to that – like your Google ID and Open ID that you don’t have to pay for either.

    • Worst idea ever. Although people are buying this IPO stuff, that would be something no one would buy not even the fat, lazy and naïve western people.

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