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Why Facebook is not worth $ 100 billion (or what is business)


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According to the experts’ opinions, a rough estimate of Facebook value after the stock market launch (IPO) will make $ 100 billion U.S. dollars. Now Zuckerberg's brainchild will be next to such giants as Disney ($ 70 billion), Billiton ($ 72 billion), Amazon ($ 82 billion) and McDonald's ($ 101 billion). People enthusiastically clap their hands and count the approximate income from shares in the first year of trading.

Let's move away for a while from the general euphoria, and think about what is happening right now. In this article, I'll tell you a little story and offer you to do some math using open sources of information. And to keep things interesting let us compare with Facebook one already mentioned above company with roughly the same market capitalization.

McDonald’s Corporation (ticker: MCD) was founded in 1940 by two McDonald brothers who little by little won the popularity among the American population. Ray Kroc bought this promising company and turned it into one of the greatest franchises that exists today. The company is represented by 26000 business operators, and in addition to the fast food chain there are 6000 premises, such as warehouses, and so on. In the McDonald’s works about 1.7 million people worldwide. The company sells food at $ 24 billion per year, and it receives about $ 5 billion in net profit.

Facebook employs about 3200 people and it generates about $ 1.2 million of gross income on 1 employee (a total of $ 3.8 billion), and $ 1 billion in net income. The company's assets for the most part are the intellectual property (aka goodwill), and now their cost makes the value of all assets of MySpace combined that just a few years ago had different valuations (now the people lost their interest in MySpace, but who cares, right?).

On the other hand McDonald’s keeps $ 30 billion in the cash, factories, newspapers, ships, equipment and real estate, and only 2.5 billion of the goodwill that includes their brand.

The guys from Facebook like telling that their services are used by 800 million people around the world, and that situation reminds me the news about the McDonald’s when they boasted that served a 1 billion customer. 27 million people eat at MCD chain every day, which gives us a figure of 9.85 million annual customers, generating the revenue and earnings in 4 times more than those who use Facebook.

The investors have discovered the McDonald’s worth over time, and in my humble opinion, before a $ 100 billion can be safely put the prefix "only", but this is a topic for another article.

So, let us think about when you park at the eatery with a yellow logo, you have already made a decision to leave your money, five (or so) dollars, exchanging them for the food. The food that is produced, packaged, delivered and cooked by them! They'll sell you the same food and put away $ 1 dollar in their pocket. And they will make it 27 million times a day. I understand that this is the real business!

What does Facebook? They represent a free service that is already enjoyed by many, many people. They sell to advertisers your eyes at a rate of $ 3 million a day for 800 million pairs of eyes, which makes approximately 0.375 per eye. McDonald's makes in 25 times more of net profit!

Could FB interest in its service in 25 times more people than at present? Of course! It remains only to colonize other planets and put another 20 billion people on the Internet. Okay, let us rephrase this question, could FB convince the advertisers to pay in 25 times more for a user than they pay now? It is difficult, right? Let's assume that the number of users of social networks has doubled. And suppose that Facebook increased its advertising rates, forcing advertisers to pay the company only in 12 times more than they do at the moment. In short, 48 cents for men that do not even buy a product, and they do not give any guarantee that will purchase it. Whereas the McDonald's customer personally will bring and give them the money.

Conclusion


Dear UMuble users, I'm not advertising in any way above mentioned fast food chain. I just tried using a simple analysis to point out the difference between these two businesses, which assets are almost identical today.

So, I strongly suggest to be very careful when you invest your money in companies, otherwise you may be a next person in line in McDonald's!
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Sparks 15 march 2012, 15:06
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