It’s no surprise, I’m a big believer in Facebook, its future not just as a company and service but also as a business and in the fact that its current valuation of $100B or so, seen as outrageous by some is actually a bargain. I had an interesting discussion with Bret in the comment section of a recent post as he disagreed with the notion that Facebook was a solid business. His main argument was that Facebook was not diversified enough and mentioned his post about 4 investing lessons (not only is Bret a great and interesting commenter on here but he does have his own blog). Today I will answer that argument not only for Bret but all of the others that doubt Facebook’s value.
Myth #1 – Facebook Is A One Trick Pony: Interesting that Facebook is now being accused of that as up until recently, that was one of the main points of criticism regarding Google. First off, contrary to popular belief, Facebook has revenues from 2 very different sources. There is advertising of course (more on that later) but also credits. Increasingly, transactions are occurring through Facebook. It started as a “tax” on gaming apps such as Zynga’s but as more companies start to plan transactional features on Facebook, the credits part becomes an increasingly attractive business. Facebook credits are a virtual currency that makes it easier for users to spend online. They can give their credit card info to one party (Facebook) and then use acquired credits to buy other items. Facebook charges 30% to merchants and is making hundreds of millions per year through this.
Myth #2 – Facebook’s Advertising Revenues Could “Go Away”: Just this week, Facebook started offering advertisers the option of targeting by zip code, city and state as well as by all of the existing methods (job, school, interests, etc). Facebook and Google are by far the two companies that have the most knowledge about internet users and in the advertising world, that is incredibly valuable.
Myth #3 – Facebook Will Fade Away: I’m not saying that it will not happen eventually. However, after seeing Google come up with a product that was so well designed (Google+) and using its powerful network to promote it, I was one of those who said that Google did have a shot at competing with Facebook. A few weeks later, Google already seems to have lost its momentum and while it has tens of millions of users already, they are spending little time on Google+ making it even more clear that competing with Facebook will be a tremendously difficult task. Also, just think about all of those companies such as Coca-Cola and Nike that are spending millions promoting their Facebook pages. Do you think they would do so if they believed that it might be declining or that the risk was significant?
Myth #4 – Revenues Will Not Flow To Facebook: Over the last century, advertising dollars have always followed users from newspapers, magazines, radio, television and now the internet. Facebook is already making billions in revenues, has the most used service on the internet where users spend more time than anywhere else. That will continue to translate into revenues
Myth #5 – This Is Another Dot Com Bubble: While some companies such as Pandora (P) remind me of that period with no profits and no clear plan to profitability, companies such as Facebook have been profitable for years and those margins are increasing constantly. Are valuations out of hand? I personally do not think so in most cases.
Is Facebook a sure thing? No, of course not. Few young technology companies are. But I would say that Facebook will be much more difficult to compete with than anyone else except for Google which is part of the reason why I think the risks involved are overblown.
How Long Will It Take Mark Zuckerberg To Become The World’s Richest Man?
Think about it… Have you ever heard of a young tech prodigy that founded a company that had a great impact, that helped him become the world richest man. This man also signed the giving pledge as he, his wife and Warren Buffett are behind the effort to get this pledge signed by as many of the world’s billionaires as possible. I am of course talking about Bill Gates. How interesting it was to see Bill Gates interview Mark Zuckerberg as it seems so clear that Zuckerberg is following the Gates path.
Back to the question though. Is it realistic for Zuckerberg to hope get to the top of Facebook? In 2011, the richest man in the world is Mexico’s Carlos Slim with an estimated net worth of $74 billion!!! How far is Zuckerberg? Not that far I would argue.
Mark Zuckerberg is estimated to own 24.6% of Facebook, a company that will likely go public next year. Obviously, it is not clear what that stake is worth. However, many, like myself, believe that Facebook would be an incredible bargain at a $100 billion valuation. More likely, the company will be trading higher if revenues and earnings are in line with current estimates. At a $150 billion valuation, Zuckerberg’s stake would be worth close to $35 billion, putting him at #6 in the world behind Carlos Slim, Bill Gates, Warren Buffett, Bernard Arnault and Larry Ellison.
Still Short Of Slim’s $74 Billion
There is no doubt that getting to that first $37 billion will be much easier than the second part. It’s not as if Zuckerberg will be creating a second Facebook. However, I do expect the company to grow. He has been said to believe Facebook will become the first company to ever be worth $1000 Billion. That is highly unlikely. However, seeing Facebook become the most valuable tech company in the world is very possible. That would mean overtaking Apple’s $330 Billion market cap… if that happened, Zuckerberg’s stake would make him the richest man in the world (assuming the others remain close to their current values).
Can Facebook Truly Overtake Apple?
I think it would be difficult to justfiy how Facebook would pull this off right now because the company still has so much of its focus on user experience rather than revenues and profits. However, I think the possibilities are almost endless and risks are rather small for the leading social network.
What do you think? Will Zuckerberg one day be the world’s richest man? If so, how long will it take?