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How much does Facebook really cost?


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The second quarter of 2012 is in a full swing, and the number of rumors is growing around IPO of number 1 social network. Let's recall what happened to this network and try to calculate how much it really costs. Where did the figure of $ 100 billion come from? And why is it overstated?

According to the Reuters news agency, FB is going to do IPO in the second half of 2012. Facebook was estimated at 100 billion dollars in 2011. The truth is that this was reported by the CNBC news agency to quote unnamed sources. Namely, the CNBC just took this figure from nowhere, and the appearance of this figure has manipulated an opinion.

Money:


Well, let's imagine that FB costs 100 billion dollars. Wikipedia says that last year was the Day of 7 Billion in late October, and the world's population has exceeded this figure. Then it turns out that if FB would be handed out to all people the money, then each user would have had $ 14.28 dollars on the planet. FB says that they have about 845 millions active users. So it turns out, the cost of 1 person is around $ 120 dollars. I think that these figures are overstated. In general, I tend to think that the amount of 100 billion is only a psychological evaluation, and it is something like a hundred thousand millions. A person who never had $ 1 million dollars it is hard to imagine the difference between $ 1 million and $ 100 million dollars, for him it is just "a lot". I guess you remember the people of African tribes, where the numerals are only 1, 2 and "a lot".

I suggest using at least an abstract understanding of the variables. According to Google finance, market capitalization (market value) IT companies are already on the market (the price is in $ billion, slash indicates P/E):

Apple 560/17
Microsoft 270/11
Google 208/21
Amazon 92/147
Yahoo 18/18
Groupon 12 / -
LinkedIn 10/872
Yandex 8/45

However, there is one thing. First, if you start buying the shares in unlimited quantities, having unlimited funding, the price will change. In order to control of the company you do not need 100% of the shares, you just need to get a controlling interest. Also you do not forget about the P/E index. P/E coefficient is the ratio of price/earnings (it is the market capitalization of company to its annual profits). For example, if you rent a house on the beach that costs $ 3 million dollars (this is your asset) for 30 thousand per month, then its P/E is equal to 8.3. This is normal, because P/E of good companies is around 10. P/E of Daimler Company that makes Mercedes is 8.5. Notice that P/E coefficients of Amazon and LinkedIn are greatly overstated. Groupon does not give any P/E at all.

Now let’s calculate how much FB really costs. The numbers will be taken from the SEC (Securities and Exchange Commission in the USA).

Here is the registration statement of SEC on Facebook.

February 1, 2012 Facebook prepared a document that every company prepares before IPO launching. I always thought that first we must look at deeds of people, because they show the true intentions. Also, it is the same with the companies. The financial situation of the company shows exactly where the company is really moving, and the imagemakers and marketing people can say anything about the company. The numbers are just a tool in the hands of people!

This is the most interesting picture with the info.
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So the revenue is all incoming money into social network.
Cost of revenue is the expenses for the business.
Net income is income after taxes and other fees and expenses.

In 2011, FB has earned $ 1 billion dollars. The growth rate is quite fast. Starting from 2009 to 2010 profit rose in 3 times, from 2010 to 2011 in 2 times. This picture has more detailed information, starting from 2007.

FB has received 87% of all revenues just from the advertising. This picture shows that the growth rate of earnings gets slowed from year to year.
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What is asset? It is $ 6.3 billion dollars.

Audience:


In the online business audience is a key concept. If you would have a website, it is the quantity and quality of the audience determines how much you can earn on this website. In the case of FB, the audience is enjoying the network, looking at advertising, and FB id getting the money from the advertisers. The business model is a quite simple.

FB states that they have 845 million active users. That is, every seventh inhabitant of Earth planet is an active user of FB. Forget about the other social networks :) I think it put it mildly, an exaggeration. I think many people have their own websites on the Internet. Many of them keep statistics about the visiting traffic and they know their audience. Even if we take into account the social network where users are constantly online, according to mine calculations it is about 200 million users only.

Let's do not forget about the other social networks, and take a look at the data on the population of the Earth in January of this year:
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If we look at the numbers and try to gather 845 million users, we will hardly get 200 million users, and it is much more realistic figure. If we take into account the social networks of China, orkut, vk.com, then a figure of 845 million users is totally unrealistic.

Let's take a look at TNS statistics on the VK.com (Project TNS Web Index). The total reported audience is 90 million people. The active audience is 20 million. It is less in 4 times. I think FB figures are overstated like the over mentioned. If Facebook says that it has 845 million users, they have only about 200 million users.

Finally, I think that the growth of FB got to a level where it is not developing as fast as in the 2007-2011, and it is already a mature project with a constant stream of profits. Facebook has no room for growing, because all people who could register on FB are already there. Well, if there is no room for growing, it's time for the IPO launching to collect all the possible profits.

Pay attention to the structure of the company. I do not think many people remember the Dot-com collapse in 2000-2001 in the USA. Internet companies do not have the assets, such as the intellectual property. Any social network can be copied within 1-2 months. The asset of this company is its brand and the audience, because many people use it. It is impossible to copy the company, such as Boeing and Intel. They have the assets that cannot be copied or created from the scratch.

There are many engineers who can design processors, but on the whole planet is just a few people who know how to make the best processors. These people work at Intel. In order to create something new and high technology, it is needed to have the previous experience in developing technologies to be based on what has been created. Therefore, no matter what anyone says, but Intel's main asset is not even their super technological plants, not a legal or marketing departments, and their engineers are the main asset of Intel like in any other manufacturing company. Namely, they create the products and nobody could copy them.

It is not difficult to create an analogue of FB, and there are many clones out there. So what's the problem? The key is the promotion. It is very easy to create a clone of FB, but it is hard to promote it to a similar size. Facebook’s asset is the client base globally. How can it be monetized? There could be used the content or all sorts of direct advertising, paid services, services, games and other things. This is topical for the audience that enjoys the FB, and not just registered with it. Personally, I do not believe that they have 845 million active users per month. This is nonsense.

What’s the result?

As a result, we have:


1) The assets of the company: 6.3 billion dollars.
2) The revenues: 3.7 billion dollars.
3) The income: 1 billion dollars.
The growth rate of earnings has slowed since the social network has come to its final stage in the development.

How much can such an asset really cost? Well, I think that no more than $ 15 billion dollars, including the future development.

This information is official from FB. Savvy guys from the Wall Street have already read all that. In 2012, they will receive the income from it, when people like you and me will buy shares of Facebook.

Back in 2011, they bought the securities on the 3 billion dollars. I think they would not invest the money if they could not see the possibilities for their own growth. Just imagine, you have a business, it brings the money, you reinvest the funds again and get even more money. Would you spend money on the securities with a lower income? I think that is unlikely.

The company's goal is when launching IPO to get as many assets as possible from the market, selling its shares. If you look at the Yandex (the company that I love and respect) its offering price was $ 40 dollars, and today it is worth $ 26 dollars.

Groupon is a new tech bubble. There will be a repetition of 2000. Markets have no memory, because the investment managers get fired for the loss of money. Then, new people come and do not remember the mistakes of their predecessors.

Here is a classic example of tech-companies IPO: they create the buying fever, mega positive news flow, and the investors are rushing to buy these securities. At the beginning these shares skyrocket from 50 to 100%, then a couple of months they hang out around the top. Insiders have come to the maximum. Others get short. Then a crash happens at times, and they go down and stay down there for half of the year. If the company survives and proves the viability of its business model, then a slow rise begins to a fair price, and you can buy them.

Yandex is a classic example of tech-companies IPO. Using its example, you can clearly see that.
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Here is the whole way of Yandex life shares (click Zoom: All)

Whoever bought Yandex at $ 40 at the end of March 2011, probably he still keeps them. It is excellent investment, yes. I said before that Yandex is a very successful company in the IT market, and in my opinion, it has a great future.
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IPO launching can raise good money. But ordinary guys like you and me will not be allowed to invest. If the shares are available for public it is a signal of the quick crash. They do not need the money for the development of operational activities related to the network. So it's time to go to market and get the maximum amount of money.

The same thing will happen to Facebook. I advise you to watch a new blockbuster “Facebook lures investors” in the 2012. Co-actors will be Zuckerberg and the guys from the Morgan Stanley :)

Finally, here is a video:

You know guys what to do next!
Tags: Facebook, IPO
ZimerMan 6 april 2012, 11:48
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