Home > Media and Advertising, Technology > Facebook’s $ 50 billion dollar question

Facebook’s $ 50 billion dollar question

I posted an offhanded remark on a Wall Street Journal article regarding the Goldman Sachs – Facebook deal and it received a lot of recommendations. As such I am reposting it on my blog.

When a firm gets to a certain critical mass, governments take interest. If the SEC is not doing something about it, rest assured the EU is waiting. We’ve seen Bill Gates take on the government and lose, the same with Google. Now it is Facebook’s turn.

Facebook is doing a much better job as repository of data and information on citizens than governments who traditionally held that role. The Head of FBI knocks on Zuckerberg’s door because Facebook’s database is better than the FBI’s. Think about it, we have this little booklet called a passport and when we travel we get little stamps on them at certain checkpoints in a country. This will prove where you’ve been. Facebook not only knows where you’ve been, it has pictures of you and your friends, what you did, what your thoughts were at that moment. Those of you who have used ‘Facebook Places’ will know that Facebook even has up to date information on your location, your status update, and possibly what you are thinking of doing next. This information is stored ‘forever’ and can be accessed at the speed of light! And the beauty of it all – it knows this information because YOU uploaded it!

I can easily see $100 billion valuation within 36 months; it is in a blue ocean in terms of growth potential. Remember, buy the rumour, sell the fact.

Being the last of Generation Y (same age group as Zuckerberg), we are one of the last generations who remember life before the Internet. And as a full Web 2.0 generation, I know of a simple litmus test that can justify the $50 billion valuation right now. How much time do I spend on Google? An awful lot; it is indispensable. How much time do I spend on Facebook? Answer: a lot more time than I spend on Google. Not because I have to, but because I want to. It may not say much about my generation, but it says a lot about ‘Facebook Effect’.

On a side note, Goldman Sachs went down one notch in my book. They are no longer the smartest guy in the room considering how they handled the Facebook deal. GS is blaming investors for the leak and investors are blaming GS for the leak. It is ironic that GS did not see it coming. After all, Facebook and Zuckerberg’s mantra is about empowering people and encouraging us to SHARE information…

With regards to their current sky-high valuation of $50 billion and stratospheric price-to-earnings ratio, consider this – before Facebook came along, Google was the number one advertising firm in the world. That’s right, it is Google, not some Madison Avenue firm. Google’s genius in terms of monetisation was its ability to sell adverts based upon our search query. It had the critical mass and it was the largest search engine. Advertisers pay a premium to ensure that their adverts reach their targeted demographics. Google’s analytics can provide pretty accurate information about its user even though most of it is guesswork. Over time, Google built a database of its users’ surfing habits and tailored the adverts accordingly. Therefore, advertisers continue to pay a premium for this.

Now consider Facebook. Facebook knows exactly who you are, your age, your background, the school you went to, your music taste, your likes and dislikes, your interest groups, even your vocabulary and etc. How? Because you TOLD it. Unlike Google there is no guesswork involved. This is an advertiser’s dream! If you wanted to advertise only to women in Timbaktu between the age of 23 to 55 who herd goats, supports Obama and listen to Metallica – technically, you can.

So in terms of Facebook’s ability to grow and monetise this, if the past is any indication of the future and Google became what it is now primarily through ad revenues, then there is no reason why Facebook cannot hit $100b within the next 36 months. Facebook has already overtaken Google as the most visited site in the US. Only three years ago, who would have thought Facebook would hit every important milestone faster than Google?

When the Web arrived in the early 1990s, it went mainstream. The number of people on the Internet exploded, from 2.6 million in 1990 to 385 million in 2000. Facebook went from nil to 600 million users in about half that time…

More than a year ago I wrote a post on Facebook. Everything I said has come to pass. Remember when Zuckerberg turned down $1 billion from Yahoo, everyone said he was crazy. When it was valued at $10 billion by Microsoft, everyone said MSFT grossly overpaid. When it was valued at $25 billion by Russians everyone said the same thing – overpriced!. Now at $50 billion everyone is saying the same thing AGAIN, yet investors are throwing money at it like there is no tomorrow. My guess is when it hits $100 billion everyone will still be saying the same thing.

Remember the cardinal rule of Wall Street: Buy the rumour, sell the fact

See also: http://davidwong.co.uk/2009/11/08/no-business-plan-no-problem/

UPDATE: Two months after this blog post was first published, Secondmarket valuation of Facebook exceeds $70 billion (so much for 36 months.)

Update: On Facebook IPO with a $100 bn valuation my ‘call’ proved to be true. I shorted Facebook, got filled at 41!!, took profits at 38, thinking Morgan Stanley would support the IPO price. They didn’t and it crashed without me. I shorted again in low 30s, held it all the way to 18. When asked when I would stop shorting Facebook, I replied 17-18, which really meant that is when I am taking profits. This again came true. I think FB really should be 12-15; investors are unwilling to cut their losses so it will take time to get there. It will be volatile, but in the low double digits is where I peg FB (as of Aug 2012). However, due to margin of safety, I won’t short above 20 and this was my trade of the year… everything worked to plan. If only I had a way of getting in early, I would have rode it all the way up and shorted it all the way down…

  1. January 19, 2011 at 1:48 am

    Thanks for sharing. =)

  2. January 19, 2011 at 3:34 am

    Excellent commentary David! Thank you!

  3. Anonymous
    March 17, 2011 at 4:08 pm

    Its a good read…..

  4. Madhav
    March 17, 2011 at 4:09 pm

    Its a good read…. I am sharing it….

  5. Honza
    March 21, 2011 at 12:32 am

    Very good indeed!

  1. April 5, 2011 at 5:59 pm

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