Why Facebook can’t be worth over $50bn when it is sold on the stock market
9th June 2011 by Simon Malone 6 comments
Since its launch 2005, Facebook has amassed over 500 million active users all over the world and has been the driving force behind the “social media revolution”. The growth has been incredible, but can Facebook really be worth over $50bn if and when it is sold on the stock market?
The “Facebook.com” web address was purchased in August 2005 and the aim of the site was to “be a social utility that helps people communicate more efficiently with their friends, family and co-workers.” It has certainly achieved that aim in a big way as according to the official site statistics, over 700 billion minutes are spent on site every month and nearly 8 billion pieces of information between are shared between users every week! The site has continued to evolve over the years and features such as company Fan Pages, live chat and now personal e-mail addresses are securing its position as the number one social media site in the world.
Facebook’s homepage states that “it’s free and always will be”, so it’s a fair question to ask where and how Facebook actually generates revenue. According to MSNBC, the majority of the company’s reported $600m revenue in 2010 came via the targeted advertisements you see on the right hand side of the pages when you visit the site. Facebook records a huge amount of the user’s demographic and behavioural information and makes this available to marketers so they can accurately pinpoint their target audience with these adverts. Facebook charges a premium depending on the nature of these adverts and this is their main revenue generator.
Facebook also generates money from company’s who host games and applications on the site. Companies such as Zynga that own and run “Farmville” and “Mafia Wars” pay Facebook for the space on the site and subsequently sell on advertising to other agencies to target gamers using their applications on Facebook.
As the number of worldwide users increases, and Facebook secures its place as the number one social networking site in the world, the number of large corporate companies using it to interact with their customer base will also increase. This is obviously great news for Facebook and the numbers show that this growth currently shows no signs of slowing.
Another reason for celebration at Facebook HQ in California came earlier this year when the investment bank, Goldman Sachs invested $450m (£291m) in a deal that valued Facebook at around $50bn and instantly doubled the net worth of Mark Zuckerberg, who owns just over a quarter of the firm, to $14bn.
Some very optimistic blogs and news articles have recently reported that Facebook revenues could have increased to as much as $2billion a year. Even at those incredibly optimistic figures, the Goldman Sachs investment values the business at more than 25 times higher than the current value of the shares.
Based on those numbers, according the Forbes.Com “Top 200”, Facebook is worth more than British American Tobacco, Sony, Nissan and Tesco. All these companies have decades of growth, profits and global sales behind them, but have seemingly been overtaken in value by Facebook in less than 7 years.
(Can Facebook really worth more than Tesco and Sony?)
This might just be a sign of the speed of innovation in the social media age and at 25 I might already be “out of touch”, but that just doesn’t seem right to me. Of course, Facebook is a very exciting product and its growth has outstripped any web based product or site which came before it, but can it really be worth the huge price tag that has been slapped on it?
Facebook relies on huge numbers of visitors to its site to generate revenue. If for some reason, a different site with a better proposition came along; could people walk away and leave Facebook much as they did with MySpace? There is no sign of that at the moment, but with the current rate of technological developments, anything is possible. No one saw Facebook coming in July 2005 when Rupert Murdoch’s News Corp purchased MySpace for over $580m did they?
Also, Time Magazine makes a very interesting point that compared to a
company such as Google, Facebook’s advertising model is nowhere near as robust.
of Facebook’s revenue comes from low-end display advertising. And though it
will benefit from marketers’ growing interest in word-of-mouth promotion, the
company will have to scrap for those dollars with traditional media brands,
whose rich content makes them attractive venues for social-media advertising
too.” They operate in a busy market place and with the developments in QR codes
and other Augmented Reality marketing, it is only set to become busier and more
competitive and their margins may welll suffer as a direct result.
Technology firms with a strong idea or concept have historically produced huge market expectation and valuations. Back in 1999 dotcom companies such as Pets.com, Kozmo.com and EToys.com attracted millions of dollars of investment and ultimately failed flamboyantly with huge debts. I am not saying this will happen to Facebook, but there are lessons to take from the dot.com flops of the early 2000’s.
No one can say with any certainty what the state of social media, the internet, and consumer behaviour will be in the next few years. The company has had an incredible first 6 or 7 years, but is that growth sustainable? Are consumers going to continue to allow Facebook to capture and share their profile information with other companies for marketing purposes? Will Facebook be able to retain its huge base of regular users if a competitor with a more attractive proposition arrives on the scene? Will people continue to want to lead a 24/7 social lifestyle where they are always connected to others via the internet?
If the answer to any one of those questions is “no” then the future for Facebook may not be as bright as it currently seems. History shows that overstating the value of businesses that ultimately don’t deliver can have a dramatic effect on global economies which is the last thing any of us need right now. Only time will tell what happens to Facebook, but I am going to stick my neck out and say that a price tag of $50bn simply can’t be justified and a correction in the coming years will bring Facebook’s value back to somewhere closer to reality.
I know people have strong opinions on the future of Facebook and the profitability of Social Media generally, so please do let me know what you think by posting a comment below – it would be great to hear your views on this!