Facebook’s 1st-Quarter Profit Falls 12%(dealbook.nytimes.com)
dealbook.nytimes.com
Facebook’s 1st-Quarter Profit Falls 12%
http://dealbook.nytimes.com/2012/04/23/facebooks-1st-quarter-profit-falls-12/?nl=business&emc=edit_dlbkpm_20120423
42 comments
Facebook's valuation is based on potential, as opposed to any real metrics. It has a staggering number of active users and frightening amounts of data about them. The bet is that they find a way to capitalize on it.
I'm not bullish on facebook by any stretch of the imagination, and their P/E is ridiculous, but it's also the wrong metric to be looking at when deciding whether it's a good investment.
I'm not bullish on facebook by any stretch of the imagination, and their P/E is ridiculous, but it's also the wrong metric to be looking at when deciding whether it's a good investment.
> It has a staggering number of active users and frightening amounts of data about them
The financial value of those users must grow super-linearly. The most recent figures I can find put them at having 901 million active users, which means they're valued at $111 per active user. Crazy stuff.
The financial value of those users must grow super-linearly. The most recent figures I can find put them at having 901 million active users, which means they're valued at $111 per active user. Crazy stuff.
If they can sell a $3 CPM, and each user loads 40,000 impressions lifetime, then they've monetized each user at $120 over that time period. That's a lot of impressions per user, but people click a lot on facebook. Plenty of room for them to grow.
That's a ridiculously high CPM for social media. The page views are very low value, even with all the targeting. Considering their revenue now and their traffic figures (over 1 trillion page views a month), their average is currently very low. $1B / 3T page views = $.33 RPM. They get a decent chunk of revenue through things other than advertising (namely their payments system) and that's a low-ball on the traffic, their traffic is very low value. Further growth is likely to come from international markets that are also very tough to monetize. To get that RPM up 10-20x would be astonishing.
I still don't see their endgame being traditional display advertising. It just can't provide the kind of cash they need. I think we'll see the engineers at facebook find ways to directly exploit the value of their network, but I only have vague notions of how they might do that.
Honestly (as not a familiar of FB's advert system), can they sell a $3 CPM? On every impression of a user -- inventory typically degrades as session-impressions degrade?
40K impressions would require 110 pageviews/day over 365 days. For comparison, Reddit averages 13 pageviews/visit [0]. I imagine both are largely dependent on their image traffic; can we draw conclusions between the two? Anecdotal evidence would have me believe I load less "ad pageviews" on Facebook than Reddit.
[0] http://blog.reddit.com/2012/01/2-billion-beyond.html
40K impressions would require 110 pageviews/day over 365 days. For comparison, Reddit averages 13 pageviews/visit [0]. I imagine both are largely dependent on their image traffic; can we draw conclusions between the two? Anecdotal evidence would have me believe I load less "ad pageviews" on Facebook than Reddit.
[0] http://blog.reddit.com/2012/01/2-billion-beyond.html
Nice writeup.. one thing I'd add is that usually when companies are given 100 P/E type valuations, it's because everyone's assuming they have lots of growth in front of them. FB is already a dominant player that pretty much _everyone_ in developed countries is either using or has decided not to use. Is there really a scenario in which one sees the usage doubling or tripling down the road? It seems like you'd need to believe that to support a 100 P/E and ~20x sales kind of valuation. 30B or so seems like a much more viable level.
I doubt it's based on userbase expansion so much as it is a bet on massive monetization.
Personally, with their existing model, I think that's tough. Unlike search, the monetization rates just won't be that high, since it's not a point where a user is trying to solve a problem they're willing to pay for.
But they might surprise us, and if they find a good monetization model, that's a lot of collective person-hours of exposure.
Personally, with their existing model, I think that's tough. Unlike search, the monetization rates just won't be that high, since it's not a point where a user is trying to solve a problem they're willing to pay for.
But they might surprise us, and if they find a good monetization model, that's a lot of collective person-hours of exposure.
I think you've hit the key - if they find a good monetization model. I remember an article on here about Facebook shutting down a social shopping experiment, but if that had panned out it could have been huge. There are always rumblings of "social search" every once in a while. Likewise, it isn't hard to imagine communications changing in the next 10 years to a system where your wireless carrier is just a data connection and Facebook could potentially power VoIP and video communications over that.
But I think the valuation is quite high for a potential that they haven't shown they can leverage their users toward. Google hasn't shown that it can leverage its might toward, say, social. However, Google's valuation isn't so high compared to its earnings. For me, it's a big bet to assume a company can drastically change its monetization.
But I think the valuation is quite high for a potential that they haven't shown they can leverage their users toward. Google hasn't shown that it can leverage its might toward, say, social. However, Google's valuation isn't so high compared to its earnings. For me, it's a big bet to assume a company can drastically change its monetization.
So it's based on the assumption that to date, they've failed to efficiently monetize their user base? They've had advertising for years. They're not going to start charging users. Shopping stuff is great but it's basically affiliate sales.
Saying "we're super popular, and we're going to figure out the monetization later" is pretty bubbly. It's equivalent to "ignore the financials."
Saying "we're super popular, and we're going to figure out the monetization later" is pretty bubbly. It's equivalent to "ignore the financials."
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Only way I can see them fitting into $100bn valuation is if they come out with an AdSense competitor that not only is contextual, but if you are signed into FB also based on your likes/social graph.
I am predicting that eventually Facebook is going to go the way of MySpace and AOL, but I don't think that this quarter is indicative of the trend. Both the number of daily and monthly active users jumped by more than 100 million, and Facebook also increased their marketing and S&D expenditures by more than 100 million.
If someone were to suggest that Facebook will eventually fall, the raw data from this quarter will not provide a sufficient argument. My argument would come from the idea that Facebook is currently acting like a very greedy company, with aggressive publishing of advertisements and aggressive policies that may eventually scare away the user base.
Especially with the internet becoming increasingly aware of the lack of privacy vs. the usefulness of privacy, it would be easy for Facebook to end up on the list of "bad guys" if they don't tread carefully. My prediction is that they will eventually overstep their bounds in greed, but it's too early to be comfortable with that prediction.
If someone were to suggest that Facebook will eventually fall, the raw data from this quarter will not provide a sufficient argument. My argument would come from the idea that Facebook is currently acting like a very greedy company, with aggressive publishing of advertisements and aggressive policies that may eventually scare away the user base.
Especially with the internet becoming increasingly aware of the lack of privacy vs. the usefulness of privacy, it would be easy for Facebook to end up on the list of "bad guys" if they don't tread carefully. My prediction is that they will eventually overstep their bounds in greed, but it's too early to be comfortable with that prediction.
I completely agree. Facebook is providing a platform in a market that has always been extremely volatile, and are using their position to make questionable decisions. It will back-fire eventually.
Personally, I can't honestly see facebook being nearly as central in 5 years time, if it exists at all. Some hot new thing will come along and do sharing better and everyone will jump all at once.
Personally, I can't honestly see facebook being nearly as central in 5 years time, if it exists at all. Some hot new thing will come along and do sharing better and everyone will jump all at once.
Its profit, its going to be volatile. Honestly some folks will want to say the sky is falling but a lot of folks will point out that any profit at all for a company growing like Facebook is a waste of perfectly good cash.
Please explain why it is bad for a growing company to turn a profit?
I assume one could say the spare money could be spent on growing the company, making more money in the longer run.
(disclaimer: I have no idea what I'm talking about)
(disclaimer: I have no idea what I'm talking about)
Right.
Good corporate governance points toward the maximization of long-term shareholder value, as measured by the present value of payments to shareholders (dividends, buybacks, etc.) http://en.wikipedia.org/wiki/Net_present_value
Silicon Valley has a somewhat bizarre culture of viewing dividend payments as "defeat", as in, "We can't find anything better to do with the cash because we aren't innovative, so we're giving it back to our investors". This is where the (strange) logic of profit=evil comes from in these conversations.
Good corporate governance points toward the maximization of long-term shareholder value, as measured by the present value of payments to shareholders (dividends, buybacks, etc.) http://en.wikipedia.org/wiki/Net_present_value
Silicon Valley has a somewhat bizarre culture of viewing dividend payments as "defeat", as in, "We can't find anything better to do with the cash because we aren't innovative, so we're giving it back to our investors". This is where the (strange) logic of profit=evil comes from in these conversations.
because it indicates that you believe insting in your business will yield a greater return than leaving the money in the bank or with bonds.
considering that Facebook are about to raise $5B it isn't unreasonable to expect them to ramp up spending with revenue as well.
considering that Facebook are about to raise $5B it isn't unreasonable to expect them to ramp up spending with revenue as well.
You'd think so, but Facebook is also planning to raise $5 billion dollars and then ... figuratively put it in the bank.
That's compared to the previous quarter, not the same time last year. Web usage is cyclical.
No - net income in the 3 months ending Mar 2012 declined to $205m from $233m in the 3 months ending Mar 2011. A big surprise, probably some big investment in datacenters or something. Net income can be rather bumpy, revenue growth was more solid at 45% year-over-year, but even that can't justify the massive valuation. The valuation is really a bet that FB future monetization will be amazing.
Yeah, I was kind of surprised the article didn't cite Year-over-Year growth, but I don't think the other ones I saw did either.
Indeed, and Q4 (Christmas) is the peak for web advertising and most e-commerce. Even companies killing it year-over-year can show Q4->Q1 sags.
As much as I like to see people talking about profit rather than revenue, revenue is really important as long as you are profitable. It is only when you are losing large amounts of money every month that revenue is less impressive.
Facebook had over 1 billion dollars revenue in the quarter and they were profitable. Why is it so bad that they decided to spend most of that revenue to grow the business further rather than keep it as profit.
If revenue is decreasing, thats another story, but profit being down for one quarter is a result of how much they are reinvesting their money.
Facebook had over 1 billion dollars revenue in the quarter and they were profitable. Why is it so bad that they decided to spend most of that revenue to grow the business further rather than keep it as profit.
If revenue is decreasing, thats another story, but profit being down for one quarter is a result of how much they are reinvesting their money.
They still had 1 bill in revenue not so shabby. Without Facebook half the internet would appear not to function correctly be it SSO or analytics. Guess they are here forever and ever and ever
Don't fall into that trap: it's dangerous. Twelve years ago AOL was doing just as well ($1-2 billion each quarter, $300-400 million in earnings), and was the largest portal/ISP around. Blackberry and Nokia were kings of the mobile mountain five years ago.
You are only as good as your current product: Facebook's commodity is people, and people are not as loyal as you might think.
Facebook could very well be around a long time, but 'forever and ever and ever'? Smart people have lost a lot of money thinking like that. I certainly wouldn't gamble on it.
You are only as good as your current product: Facebook's commodity is people, and people are not as loyal as you might think.
Facebook could very well be around a long time, but 'forever and ever and ever'? Smart people have lost a lot of money thinking like that. I certainly wouldn't gamble on it.
Facebook also owns your social graph and that is what they exclaim proudly about the most as well. If any other service wants access to it they have to ask Facebook and they can't just take it. And if there is no Facebook integration, then theres an additional level of friction in getting new users. It's definitely a tough market to breakthrough in because of Facebook (Ask google).
> Facebook also owns your social graph
Any email provider also has your social graph. The only problem with email is that it is seen as "old" compared to the "new" of Facebook and Twitter. Something else will come along and be the new "new" and that will be the end of Facebook.
Any email provider also has your social graph. The only problem with email is that it is seen as "old" compared to the "new" of Facebook and Twitter. Something else will come along and be the new "new" and that will be the end of Facebook.
> Any email provider also has your social graph.
They really don't. Not the way Facebook does; not for the post-Millennials. People email bosses and professors and acquaintances; they use Facebook for friends.
They really don't. Not the way Facebook does; not for the post-Millennials. People email bosses and professors and acquaintances; they use Facebook for friends.
The user base can just as easily turn on them and abandon ship just like they did MySpace.
I remember when movie trailers and posters had AOL keywords in them. Now it's "Like us on Facebook!"
> Guess they are here forever and ever and ever
Google can easily de-throne facebook from the analytics crown:
1) establish a semi-dominant browser with automatic updates: done (chrome; strong on desktops, very strong on mobile)
2) establish "privacy mode" - disable likes in page, add them as a browser feature. Opt-in of course, but warn users about the privacy implications for letting a "like" button on the page go unquarantined.
3) wait a little and enjoy as Firefox (and Opera and Safari) do the same.
Within a year, facebook analytics stronghold is gone. Google has all that data from google analytics, which is about as prevalent as "likes", but does not look as devious (even though it is).
Facebook's SSO might be here to stay, but I'm sure Google are already working to undermine that as well. And that makes me happy. Not because I think google is less evil than facebook (it is less evil for now, but that could and will change after a couple of bad quarters) -- but because facebook's "like" buttons are a plague upon the web, the functionality of which SHOULD be included in browsers (assuming people and web masters want that, and it appears they do).
(Writing this as a happy RequestPolicy user who is not telling Facebook or Google Analytics anything he does not want them to know, except an IP address; I don't want them to know that, but I do have to tell them).
Google can easily de-throne facebook from the analytics crown:
1) establish a semi-dominant browser with automatic updates: done (chrome; strong on desktops, very strong on mobile)
2) establish "privacy mode" - disable likes in page, add them as a browser feature. Opt-in of course, but warn users about the privacy implications for letting a "like" button on the page go unquarantined.
3) wait a little and enjoy as Firefox (and Opera and Safari) do the same.
Within a year, facebook analytics stronghold is gone. Google has all that data from google analytics, which is about as prevalent as "likes", but does not look as devious (even though it is).
Facebook's SSO might be here to stay, but I'm sure Google are already working to undermine that as well. And that makes me happy. Not because I think google is less evil than facebook (it is less evil for now, but that could and will change after a couple of bad quarters) -- but because facebook's "like" buttons are a plague upon the web, the functionality of which SHOULD be included in browsers (assuming people and web masters want that, and it appears they do).
(Writing this as a happy RequestPolicy user who is not telling Facebook or Google Analytics anything he does not want them to know, except an IP address; I don't want them to know that, but I do have to tell them).
However, I am interested in seeing how their business diversifies over time - Google has both stability and revenue from expanding beyond search. Additional features such as SSO and analytics are increasing the value of Facebook beyond just friend-to-friend interactions, and I am curious about how their business plan will support long-term stability.
Google is actually not diversified at all. Out of $38 billion of revenue earned in 2011, $36.5 billion came from advertising[1].
[1] http://investor.google.com/financial/tables.html -- compare "Revenues" to "Total Advertising Revenues".
[1] http://investor.google.com/financial/tables.html -- compare "Revenues" to "Total Advertising Revenues".
Rather than revenue diversification, I was thinking more about product diversification. With core products like GMail, search, Plus (hah), and Google Apps, if any one of those takes a catastrophic plummet in traffic, their revenue wouldn't crash completely. In their early days, if a competitor took over search, they would have no remaining products that continued to generate revenue.
Because Google is an advertising company (so is Facebook). It shouldn't be a surprise that advertising is their main source of income. But at least you can point to a multitude of products within which Google places ads, as well as devices and software to provide places to put ads. Facebook, not so much. Yet?
Halloween should be a good time to think about buying into Facebook.
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Myself, I don't see Facebook necessarily going the way of AOL and MySpace. Facebook's engineering chops are a lot better. Sure, there's an amount of social lock-in that they shared with AOL and MySpace, but that isn't the only thing keeping Facebook on top right now. Facebook has made sure that their site runs well - a minimum of errors, predictable and decently speedy response, and a willingness to address technological challenges that keep the site humming. While we might lambaste Facebook a bit from a social perspective, they've open sourced some genuinely good tools and seem to be sticking to their technological guns. Unlike MySpace, AOL, and Yahoo, Facebook isn't morphing into a company where "media" types run the show. While the social aspect is very important for Facebook, I think there's a more engineering-centric or engineering-friendly culture that will persist there like it has at Google. I don't see the higher-ups at Facebook thinking "oh, I get the cool stuff the kids today are hip to and I just need some peon programmer to translate my awesomeness into computer speak. All programmers are interchangeable cogs, right?" I think that does speak to Facebook's longevity. In technology, you need to be able to improve your product, not just keep the lights on.
However, Facebook relies on non-technological factors more than Google or Apple. Facebook needs to remain the place people sign up when they join a social network. It isn't too hard to imagine Facebook becoming the place known as the hangout for people's parents. As someone in my twenties, I'll probably have teenagers in 15-25 years (a decent number of my friends will in 15 years). Will they want to be on the social network that I'm on - the social network of my generation? It's already weird to me when old people sign up for Facebook. I don't want to "friend" my actual friends' parents. Frankly, I'm a (slightly) different person when I'm talking to my friends and when I'm talking to my friends' parents. Likewise, Facebook is treading a thin line on sharing. In the early days, Facebook was very closed and putting something on Facebook felt more private. Facebook has been slowly changing that to the point that I wonder whether I should just edit myself a bit more and publish publicly rather than on FB in a more formal way (ie. a blog). Finally, people could just get tired of it. I'm finding less interesting things in my newsfeed as time goes on. I find that I don't feel like posting as much.
For me, Facebook's valuation at $100B seems high given its earnings. It's PE ratio is above 100 and so one has to assume much more growth than other very good companies. It might happen. However, I think Facebook faces a decent amount of uncertainty in its future. It's well-engineered and well-run compared to those who have failed that we might point to as Facebook's future, but with a social product there's more than just having good service and any number of things could hurt Facebook from privacy concerns to becoming the network of the people who went to college from 2000-2015 while younger folk find a different place to digitally hang out. I wouldn't compare them to AOL, Yahoo, or MySpace, but I'd still say Facebook's valuation is quite high.