What Is Facebook Really Worth?
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My Washington Post Sunday Business column is out. This morning, we look at how overvalued the $100 billion dollar Facebook IPO is.
The print version had the full headline What’s Facebook worth? Much less than advertised — in the online edition, it was Less than meets the eye at Facebook.
Its based on my discovery from the Facebook S1 filing that merely clicking on a “Like” button anywhere on the internet counts you as an active user according to FB’s unique metrics.
Here’s an excerpt from the column:
“Last week, I made a surprising discovery about Facebook: It has far fewer “active” users than it claims. I learned this from a note buried deep in the company’s S1 — the IPO document it filed with the SEC in order to go public. Based on its S1, the social-networking giant’s value is probably much less than most investors seem to think.
One advantage of working in finance is that you get to meet lots of very nice, really smart people such as David Wilson, who writes the Chart of the Day column for Bloomberg. His column is my Sudoku, as I challenge myself to poke holes in the correlations it identifies between various assets. It’s good wonky fun.
On Feb. 3, the column used Facebook’s SEC data to show how fast the firm was growing. FB was becoming a “daily habit for more users,” and the numbers from the IPO filing were extraordinary: 845 million Monthly Active Users and 483 million Daily Active Users.
MAU? DAU? I had never heard of either metric, and novel accounting for public companies is always a red flag. Don’t just take my word for it, ask a Groupon investor.
I thought these metrics were suspect. If you do not have to go to Facebook.com to be counted as an active user, are the metrics misleading? I asked Wilson, who pointed to details in the S1:
“Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook through our Web site or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party Web site that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.”
Let me translate: If you clicked a “Like” button anywhere on the Internet, then you are a Daily Active User. Even if you never go to Facebook.com.”
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I really like that the Post used the Limericks Économiques I referenced right at the start of the column:
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click for ginormous version of print edition
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Source:
Less than meets the eye at Facebook
Barry Ritholtz
Washington Post, February 12 2012
http://www.washingtonpost.com/business/less-than-meets-the-eye-at-facebook/2012/02/09/gIQA7RtF7Q_story.html
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February 12th, 2012 at 10:31 am
Better than a sock puppet, I suppose, the economics seem quite unconvincing. That being said, there are plenty of greater fools. Aldous Huxley wins.
February 12th, 2012 at 10:32 am
Barry, do you really think that you are onto something there? Are you a Facebook user? People don’t tend to share a lot of links on Facebook via “likes”, people tend to like comments from friends or photos. The amount of content shared via external likes is, at least in my newsfeed, negligible.
I didn’t find more actual data, but it seems that my newsfeed is right about the amount of links shared
http://www.digitalbuzzblog.com/facebook-statistics-stats-facts-2011/
February 12th, 2012 at 10:42 am
handelsblatt
Yes, I do think I am onto something, evidence by the spread between MAU and Monthly visitors and the low Annual revenue per user.
I am a Facebook user (I prefer Twitter). And I see plenty of sites showing 100s or 1000s of “Likes” for links — the link you referenced show 3,000,000 external links per hour — so yes, tons of people do this.
On Wall Street, it seems that the Valuation issue is ignored or misunderstood.
February 12th, 2012 at 11:19 am
Yeah… and if someone wanted to shed even further light onto what a racket this IPO will be, they’d talk about how the traders at the underwriting brokerages – Goldman Sachs, Morgan Stanley, etc. – will keep the stock magically suspended above its IPO price for at least a month or two to give the appearance of demand. During which, all of those private investors who don’t have stipulations saying they can’t sell, will be selling…
February 12th, 2012 at 12:03 pm
Let’s call it Farcebook.
February 12th, 2012 at 12:24 pm
For me the question will always remain: how do they plan on making money? Social networking seems a fad to me and I personally am never tempted to buy anything advertised through this medium. Maybe its just me.
February 12th, 2012 at 12:30 pm
In an earlier post, I tossed out that my read was that the Facebook valuation (est.$100 B at the time) was high by a factor of 5 or so. The more I think on it, the more I believe that I’m being much too generous.
They’ve already captured a big proportion of the population who have disposable income. There’s already high penetration in the EU and NA and there sits roughly half of the global GDP. Diminishing returns have to be setting in already.
Sure, they can try to monetize with higher efficiency by gathering data on spending habits/demographics/etc. for much more targeted marketing, but there’s a real tension here.
Ignore the politics and look at Rick Santorum’s wife. She’s a good example of someone who has swung from one social/demographic extreme to another over time. For Facebook to really work well requires all of their users to allow the gathering of information that would trace and retain these types of changes in everyone’s lifetime. That’s is a selling point? Desireable? I don’t see it, and as users evolve over time (Facebook hasn’t been around long enough for this to be a real factor), do users really want to be perpetually associated with their past selves? I don’t think s.
I’d bump my original divisor of 5 by another factor of 2-5.
February 12th, 2012 at 12:49 pm
Fa(r)ceBook.
oT or NOT ot? That is the question:
Fasten seatbelts for IranGate this week. A major international “incident” and a Fa(r)ceBook IPO failure could presage a market top IMO.
February 12th, 2012 at 2:19 pm
People who say Facebook will not fade away remind me of people who said homeowners would never walk away from their mortgages.
February 12th, 2012 at 2:26 pm
Plenty of reasons to adjudicate Facebook as a grossly overvalued entity and not worthy of investment.
Of course, I felt that way about alternative energy and big banks. Maybe Facebook will eventually qualify for a bailout or no strings attached subsidy if it plays it’s political cards wisely. It’s stretched business model looks ludicrous.
February 12th, 2012 at 2:34 pm
And that magic $1.000 billion in profits shows they have some, ummm, flexibility in accounting.
February 12th, 2012 at 3:19 pm
I say wait until tv’s are integrated with the internet to see FB’s true value. Once users are able to do real filesharing, movie streaming, photo album sharing on TV’s it will be a whole ‘nother world.
February 12th, 2012 at 7:20 pm
Farcebook…I like it! I read the S1 and thought the only reason for this is some people want to fleece…errr…make a lot of money off the options that are out there and any money that was put in. Period.
Now, it’s not that I think “Social Media is a fad” (it’s not) I’m rather old fashioned. I want to know how they are going to make money because, so far, their advertising isn’t doing it. I can tell you first hand that Facebook advertising doesn’t really work, except when you’re new and very local. And that, after a short time, you can get just as many “likes” from just people talking to people. So if people are talking to people and not clicking or reacting to ads…where is the money?
The same goes for Twitter (which, unlike Barry, I think is THE most annoying offering on the planet). How will Twitter ever make any money? Bueller? Bueller?
February 12th, 2012 at 10:27 pm
Yet again, Barry, you really should get to know the online space before drawing conclusions like this. DAU and MAU are extremely common metrics in the online space because they *make sense* in that space, moreso than older metrics like “members” that really don’t mean anything. They are hardly “novel accounting.”
You complained in an earlier post about Facebook using their “Like” buttons to track you, but now you think those same Like buttons aren’t worth anything to Facebook? Why do you think they’re tracking you then? The more sites that have Like buttons, the more Facebook knows about what sites you go to and what you’re interested in, and the easier it is for them to target ads for you, *whether you click the Like button or not*. That’s right, they can track your data and use it to better target ads to you even if you are NOT an “active” user that day by their definition.
So, after all that tracking and personal information that people give up to Facebook, you still think the average user is only worth $5? C’mon, man. Get to know the space before making commentaries like this.
February 13th, 2012 at 2:53 am
If facebook let advertising run through. mark my word people will flee just like people were leaving MySpace when the site was spammed by commercials.
February 13th, 2012 at 6:09 pm
another thing I find HIGHLY misleading that I’m positive they are using to report inflated numbers.
Many people are using tablets and large screen phones to use facebook. Facebook deliberately place ads on the right hand side allowing virtually zero room to scroll down the FB page without inadvertently launching one of the ads.
I counted at least 9 false positives this way during one 30 minute session I had checking out different music groups.
February 18th, 2012 at 12:55 pm
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