The difference between Facebook bulls and bears

The bears are only looking at Facebook’s current revenue model. The bulls are thinking about all the potential revenue models Facebook could launch, given their (highly defensible) assets.

If you look at banner advertising and ~$0.25 CPMs, it seems hard to justify $100bn for Facebook. That’s over $100 per active user, more than 100 P/E and more than 10x revenues. As others have pointed out, the growth Facebook needs to justify that valuation can’t come entirely from the userbase—there literally aren’t that many people on Earth. A lot of the growth will have to come from increased CPMs, and there is no clear path to significantly increased CPMs from banner ads.

But if you look at Facebook’s assets and think of potential revenue models they haven’t even launched yet, you can understand a much higher valuation. Imagine banner ad retargeting based on your Facebook identity—across the entire web. Imagine turning viral distribution into a paid channel, with Facebook earning a commission on social referrals. Imagine the oft-rumored Facebook phone, which we can already see the beginnings of with the Messenger and Camera apps.

I have no position in Facebook and no strong opinion on their valuation. But to value them fairly I think you have to look at the full potential of their assets, not just their current revenue model.

(Some of the ideas in post came from a conversation with Andrew Chen.)


  1. Agreed. Given the uncertainty of those future revenue models and the still limited amount of online ad $, that would justify a slightly lower valuation though – until they can prove out at least one of those models.

  2. Chris Lau says:

    Paying $100bn upfront on potential is still hope investing. I have no doubt that Facebook will be able to grow its revenue, but the quarterly downsides will mean big share price drops along the way. Meanwhile Google+ and PInterest can refine their model, giving existing users who refuse to click on ads another outlet.

    • Andrew Chen says:

      You know they are supposed to do $6.5B in revenue this year, right? And that they did $3.7B in 2011? At a 10-15X revenue multiple (I think their growth justifies that), that’s $65-$100B.

      I think it’s easy to discount them as not being a $100B business without knowing the metrics behind what they’re doing. Yes, $100B is a lot of money, but yes they are planning to do $6.5B this year and have been growing a double digits every year since their inception.

      A better and more detailed analysis than what I’m doing:

      • markrogo says:

        Getting comfortable with the 10x revenue metric — which really is a silly metric even though Gurley is a genius — puts the fair value of the company right at the current stock price. One question, Andrew, though, is how confident you are in $6.5 billion for 2012 right now. I’m less sure that’s a given after Q1 being up only 45% from 2011. The remaining quarters will have to be be seriously blowout to make up for that since $6.5 implies 75% growth for the whole year.

        Don’t get me wrong, I actually agree with the basic thesis that Facebook is highly defended and has potential far beyond the current business. I’m just not sure the current stock price is particularly off base. I’m not sure $25 would be off base either. It’s not like $40 was insane in a world where Amazon trades where it does either, but that would have been a valuation the company would need to grow into. By contrast $25 would be the kind of valuation where one could buy expecting a reasonable return — nothing guaranteed of course — over the next few years. At $32, one is sort of betting something new emerges soon to justify this rich multiple or else the “valuation hangover” effect sets in and makes it hard to make money as an investor. Impossible? Of course not. But much trickier.

        • Andrew Chen says:

          I think I’m both less well-equipped and less interested in debating the merits of Facebook’s stock over the next 3 quarters. There’s very capable financial analysts that are out there that will do a better job than me.

          Mainly I believe that Facebook is a great company with a lot of upside, and is a good growth stock even at $50B or $100B, if you plan to make the investment for the long-term. The reason is that they’ve powered their whole business on extremely unobtrusive ads in the sidebar, monetizing at $0.25 CPM. That’s as baseline as it gets. They could easily 2X or 5X their profits in the short run just by placing those ads more prominently (but they won’t).

          Similarly, while they have ~1 billion active users, I think it will be straightforward for them to be the first internet company to hit 2 billion. They’ve really perfected the art and science around growth. They also have multiple revenue lines that aren’t obvious to Wall Street but are straightforward for Facebook to execute.

          Anyway, my main point is- it’s a growth stock, and should be priced as such. Whether they hit $6.5B/yr this year, I don’t know, but I think they will get to $10B in a near-term timeframe.

          • markrogo says:

            And I tend to agree with you on all of this. The only dog I have in this hunt is that I’m in the early throes of a social startup and to that end, I don’t believe Facebook at these prices represents any sort of “end to the web 2.0 bubble”.

            The odd thing here is the company had the luxury of IPOing at such a high price a lot of the future value is already represented there. We can’t know the future, but very few companies have ever spent any time north of $500 billion in market value, let alone stuck up there.

            Of course, a Facebook that valuable would be now about 8x what the company currently trades at. And a long-term investor who could make that kind of return would probably be happy doing so over several years. In the meantime, every day the stock drops, a portion of the risk associated with buying it goes away too. Unless you believe the bear case — which my many Quora posts on the topic would show I do not at all.

  3. Winnie Lim says:

    Interestingly I answered a slightly unrelated question on Quora with a similar point:

    I personally think the naysayers of Facebook may be too shortsighted to see the bigger picture Facebook is aiming for. Then again, not many people have that sort of foresight that spans decades, else there would be more millionaires who bought Apple stock in the late 1990s. ;)

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