Facebook ($FB): It’s Not All About Revenues

By: ispeculatornew
Date posted: 05.11.2012 (5:00 am) | Write a Comment  (4 Comments)

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Everyone knows it, I’m a big believer in Facebook, in its stock $FB, and where it will lead its users, employees and investors. Facebook seems to be increasingly polarizing as its IPO approaches. Many see the biggest and most obvious sign that we are back in the a tech bubble while others such as myself think that while very risky, it:s still a great investment opportunity. I think there are plenty of arguments that are very solid reasons to think twice about buying $FB. Many others however are poor ones. Today I wanted to discuss one useless stat that has been coming up over and over:

Google revenue – $40 billion; market capitalization $200 billion (plus $40 billion of cash). Facebook revenue $4 billion; market capitalization $100 billion” – ZeroHedge

It makes a great headline, but really? Microsoft ($MSFT) makes $70B in revenues per year, less than twice Google’s but is worth nearly 3 times more. Does that Microsoft a bargain? Or maybe Yahoo ($YHOO) with a market cap of nearly $20B with revenues of $5B.

Want an even better one? Research in Motion ($RIMM) has revenues about half of Google ($GOOG) but a market cap of $7B….3.5% of Google!! I understand if you need to stop reading for a few minutes while you go load up on $RIMM…. it trades at a tiny P/E too:)

Let’s Get Serious!!!

Judging a stock with those 2 numbers is ridiculous. It might make a good headline but it’s a solid way to make investments. If you want to knock Facebook,there are plenty of good arguments to be made (recent revenues and profits decline, competition, lack of growth opportunities, questionable motives by Zuckerberg who has nearly complete control, buying shares with no actual voting power, etc). Looking at revenues misses 2 major points:

-Facebook has much higher margins than competitors
-No investor is buying Facebook at these prices based on what it has done

The second point is critical here. If Facebook is going to make revenues by selling small ads on the sidebars, generating growth by increasing its number of users and pageviews, then its valuation is insane. However, many such as myself think that Facebook will put more effort into a lot of different initiatives that will generate growth opportunities. Seeing half of Super Bowl ads point to a Facebook page has to tell you something about how much these companies believe in the value of their Facebook pages. How exactly those will be converted into dollars remains to be seen but that is why I am putting such a high value on Facebook. The company has barely tried to make profits so far. Instead, it has focused on building a strong user base, the best social network and strong relationships with corporations providing them with incredible value.

Do you agree or am I off base? Don’t get me wrong, I’m more than willing to accept criticism on my Facebook outlook but please don’t base your judgment on some meaningless stat.

 

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4 Comments

  1. Comment by Stephen — May 12, 2012 @ 8:43 pm

    I’m thinking of getting a few shares, but at what price? I’ve noticed in some IPOs the price doubles as soon as they start trading them openly. Would you still get them if they are going for around $70?

  2. Comment by Intelligent Speculator — May 13, 2012 @ 4:12 pm

    @Stephen – I’ll probably wait a bit more, I’ll be looking at it in terms of valuation, $100B is an easy pick for me but at $200B I would not buy any in all likelihood.. so I’ll have to wait and see! Only a few more days to go…

  3. Comment by Flash — May 14, 2012 @ 6:20 am

    Perfect timing on this article as I have to admit I was getting concerned with all the recent talk about Facebook’s high market valuation compared to it’s revenue. I’m a strong believer in FB as well, but I’m fairly new to investing so I’m not sure how I should play their stock. Most analysts suggest waiting until the craze dies down then invest in FB. I did come across an anlayst that said if you want to get in then put a limit order for $50. Do you think at $50 which if my math is right would put them at a market valuation of approx. $130B is too high?

    Awesome blog by the way, I’ve been a regular reader for the past few months now.

  4. Comment by IS — May 14, 2012 @ 6:33 pm

    @Flash – Very possible that it will end up being at that price or higher, personally I would probably still be a buyer at a $130B valuation…

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