Analyst Roundtable: How Has Facebook Changed?
Oh, how time flies. Seems just yesterday, Facebook (NAS: FB) was the scrappy start-up only college kids could access. Fast-forward to today, and we find an older, more robust service that is in many ways only reaching adolescence. Facebook's IPO represents a major step toward maturity for the social-media revolutionary. And in that spirit, we thought it would be apropos to revisit our own analysts' predictions about Facebook and the values several of our tech analysts pegged to it (spoiler alert: they were waaaay off). If you want to check out the roundtable in its entirety, here it is. And without further ado, here's what our analysts make of their own work four years after the fact. Take it away, boys.
In 2008, I suggested that Facebook would be worth absolutely nothing on the open market. The company had millions of members and an impressive stream of user clicks, but those clicks weren't being translated into dollars.
Things have changed since then. There's more advertising on Facebook these days, and the company handles it with an in-house framework. As Facebook evolved into a premier platform for casual gaming, it grew a micropayment system for buying stuff in games like Farmville and Bejeweled Blitz. The company actually turned a $972 million profit over the past four quarters, according to the adjusted S-1 filings.
So there's substance behind the glitz nowadays. Even so, the proposed $100 billion valuation is kind of ridiculous.
At these prices, Facebook would be worth about 25 times trailing sales and 100 times trailing earnings. Very few companies can sustain valuations like that. Don't forget to adjust your target prices for the enormous amount of business risk in the social-media wastelands. MySpace, anyone? How about Friendster? Don't worry -- there's no shame in forgetting those has-beens. Facebook is not to big to fail the same way.
I wouldn't pay more than $25 billion for the whole company today. If Facebook plays its cards right, it could be worth $50 billion by 2015 -- not $100 billion in 2012. This stock should follow the template set up by Groupon (NAS: GRPN) and Pandora Media, falling to about half their IPO prices in a matter of months.
I thought I was being optimistic valuing Facebook at $3 billion in early 2008, which at the time was 20 times the social network's trailing revenue.
That's pretty much where the market is now. Using that same measuring stick -- and with Facebook now having a little more than $4 billion in trailing revenue -- Facebook would be an $80 billion company at 20 times trailing revenue. That was the low end of the company's pricing range earlier this week, though everyone knows Facebook is going to pop above $100 billion once retail investors start grabbing shares.
Clearly, what's changed is Facebook's ability to generate revenue. The social-networking giant's monstrous growth has helped. You don't have users racking up 3.2 billion comments and likes a day without great advertising opportunities. Facebook is just starting to scratch the surface there.
However, the other component of Facebook's model that was just starting to get off the ground was Facebook as a revenue-generating platform for third-party developers. Prospectus skimmers may have been shocked to find that Zynga (NAS: ZNGA) accounted for 15% of Facebook's revenue[ during the first three months of this year, but that's just one social-gaming company.
Just imagine what's possible as more Zynga-esque situations emerge.
And they will.
Turns out I wasn't so crazy after all. When Rick, Anders, and I first debated whether Facebook would merit the presumed $15 billion valuation it had at the time -- the result of a new investment from Microsoft (NAS: MSFT) -- I thought apps would drive growth. Turns out that was only partially true. Zynga has created growth, but the allure of connecting with others has proved so overwhelming that Facebook's active user base has grown more than 14-fold in four years -- growth so outrageous that Aaron Sorkin had to make a movie about it.
As the social network's growth profile has changed, so has the advertising industry that has grown up around it. No longer is Google (NAS: GOOG) the only big dog in the digital-advertising yard. The introduction of "likes" as an indicator of interest has helped the social network win huge clients, and the business is now on track to produce $4 billion in revenue annually. Is that Rule Breaking? In every sense of the phrase, I'd say.
Facebook is all the talk today, but our chief technology analyst sees as an even better opportunity. To learn more about the one social-networking stock investors should be buying, click here to check out our free research report.
At the time this article was published At the time of publication, Fool tech analyst and editor Andrew Tonner held no financial position in any of the companies mentioned in this article, Fool contributors Tim Beyers and Anders Bylund owned shares of Google, and Fool contributor Rick Munarriz owned none of the companies mentioned here.The Motley Fool owns shares of Google and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and Google and creating a bull call spread position in Microsoft. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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