Since everyone else is playing the Facebook valuation parlor game, here is a stab at it.
First, a few numbers:
- Size of US advertising market: $130b, or ~1% of GDP (back of envelope numbers – includes Internet display only)
- Google US revenues: $17.5b
- Google global revenues: $38b
- Size of US GDP vs. global GDP: 25%
- Google valuation: $155b (excludes cash – enterprise value)
For starters, the idea of a Facebook, with about 1/4 of the revenues and 1/10 the profits, being worth 2/3 of a Google is, on the face of it, laughable.
Google is an incredible company. They are an advertiser’s wet dream. They know:
- Everything you search for.
- All the web sites you go to, based on the ad network.
- If you use their mobile apps, where you go (you know those great Google traffic maps? they’re based on how fast Google-enabled phones are traveling).
- If you use their email, what you are writing mail about (write a couple of mails about a Vegas vacation, visit some travel sites, and watch all your ads switch).
But Google has picked up some baggage. It has had privacy run-ins with authorities and advocates. It is in a very tough battle for mobile, with Apple gaining the upper hand on what is probably the platform of the future. The investor perception of Google is that the low-hanging fruit may be gone, they’re having to struggle to grow, with things like Plus, Android, imponderables like Motorola, YouTube ad saturation. The sky is no longer the limit. Maybe there’s another easy double in online ad penetration vs. offline. Maybe there isn’t. Hence the rather non-growthy 0.7 PEG ratio.
And now Facebook comes along. They have their own ad network, mobile apps, messaging. And they know even more about you: your personal life, who you associate with, and how. And they are very sticky in terms of getting users to visit every day and spend lots of time and look at lots of ads.
The key thing to understand is that these are not search or social networking or messaging companies. They are ad networks. And Facebook can target ads better than Google. A wedding photographer can target Minneapolis women who recently became engaged. That means… they can charge more for ads. If Facebook gets better rates, all the advertising partner media sites for AdWords and display will be better off on Facebook’s network. And Facebook will disrupt Google’s business. And when I die, all my friends and family will get helpful ads for undertakers and florists.
If Google doesn’t start collecting a similar level of personal information about their users, and delivering a similar level of targeting, their entire business model is in trouble. People are spending more time in social, discovering web sites via social instead of search. Hence, the big push for Google Plus.
It’s a race to the bottom on personal data collection and usage, and only regs are going to stop it.
I don’t love Facebook. My perception is that Google re-invented computing with their cloud platform, re-invented the ad model, and got where they were by building things others thought could not be done. Google realized the value of information in the Web’s link structure. Facebook is realizing the value of the information in social links between people. To some extent, they got where they are by simply taking Google’s model to the next level, going to a place Google wouldn’t go in monetizing personal information, and forcing Google to go there too. Here’s an example of the kind of information Facebook exposes and monetizes.
Back to the valuation: I think the key metric is number of users x lifetime value of a user.
Advertisers in the US spend about $500 for every man, woman and child to reach their customers. How much of that will Facebook ultimately get, how much of that will flow to the bottom line (currently about 25%), and back to shareholders? Maybe double that to include global. And what kind of discount/rate return should you expect on that money given the risks involved?
I think it’s hard to get to $100b, let alone higher numbers that are bandied about. At least in a world I like to think about, where every app and bit of content isn’t in a Facebook frame.