Posts filed under “IPOs”

Less than meets the eye at Facebook

Less than meets the eye at Facebook
Barry Ritholtz,
Washington Post
February 11, 2012


Facebook is valued at “plenty”
By Wall Street’s tech cognoscenti,
Take 1 billion friends
Times 5 dollars, then
Times IPO multiple: 20!
— Limericks Économiques


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 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

As huge as those MAU/DAU numbers were, I wondered how this detail might affect revenue. The Facebook metrics for annual revenue per user were stunningly modest: Facebook picks up $5 per user each year. Compare that to Google, which garners more than $30 per user per year. Netflix takes in closer to $144. Is this why Facebook’s annual revenues are so low compared to its 850 million user base?

Why does this user-behavior metric matter? Consider what it means in terms of how “daily users” will generate revenue and profits. If all users do is click a “Like” button, but never make it to, they cannot be “monetized.” They cannot be marketed to. They do not see any advertising. They cannot be sold any goods or services. They take advantage of FB’s extensive infrastructure to tell their FB friends (who may or may not see what they did) that they liked something online. That’s all that happens.

So they not only fail to generate revenue for Facebook that day, but they are actually a cost. It’s not cheap to maintain that massive infrastructure of Like buttons everywhere. Someone’s got to pay for the server farms that handle the back-end of this.

Consider what happened when MySpace tried to increase profits from users. With lots of pressure to drive revenue, they doubled the ads on the site. As they tried to monetize users, the site became ad-congested, a real eyesore. Users left in droves.

So how does this play into Facebook’s sky-high valuation? The company’s worth has been pushed ever higher by a series of private deals, all made before the SEC filing was made public. Microsoft made a well-timed investment of $240 million in 2008 at a $15 billion level; Elevation Partners paid $120 million at a value of $23 billion in June 2010. Goldman Sachs poured up to $2 billion into the social network at a $50 billion valuation in January 2011. All of these private investments were made by sophisticated investors, but without the benefit of the SEC data.

A year ago, I offered five questions for Facebook private investors:

• FB claimed (in January 2011) 500 million subscribers. How many of these are active users — at least once or twice a week? How many of these are dead accounts, with no activity for 30 days, 90 days or more?

• What is the average revenue per subscriber? How are you planning to grow this?

• How much churn does Facebook go through? For every 100 new subscribers, how many subscribers leave?

• What is the life cycle of the typical Facebook subscriber? How active are they for how long; what sort of arc do they cut across their FB life cycle?

• Besides advertising, how will you monetize your user base? Are you selling their data to buyers? What about anonymized data — are you selling this also?

Last month, I compiled a new list for Facebook IPO investors. Those of you thinking of buying Facebook’s IPO at these rich valuations should be comfortable with the answers to these:

• What is the IPO offering price going to be? What market capitalization will FB come public at?

• What are the key pricing metrics? P/E, growth rate, price to book, price to sales?

• What is FB’s growth potential? At 800 million users, where do they begin to plateau? Top out?

• What is FB’s plan for penetrating China?

• How are the privacy concerns going to be handled? What else might come out of the closer FTC scrutiny of Web firms’ use of personal data?

• How long are insiders/VCs going to be locked up? Are they committed to holding onto shares for the long haul, or are they cashing out at the IPO or as soon as possible thereafter?

What I learned from Facebook’s filing was that they have 161 million active users who actually go to each month. That’s not shabby — but it’s a far cry from the MAU claims of 850 million. That definition of active users is probably overstated by a factor of 500 percent. I suspect that the $100 billion valuation may be overstated by nearly as much.

Me? I’m sitting this one out.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture.


Category: Apprenticed Investor, IPOs

Yelp Going Public; Billions to Flow to Reviewers

No, not really. I am as much of a Yelp fan as I am a Facebook fan — which is to say, not much at all. As a writer, I find the write-for-free-we’re-going-public approach of Yelp/Huff Po/Seeking Alpha utterly reprehensible. As a gourmand — and a fat bastard — I prefer the Zagat model. There…Read More

Category: IPOs, Technology, Valuation

What Is Facebook Really Worth?

> 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…Read More

Category: IPOs, Valuation

Why @GSElevator Is a Fake

When the Twitter handle @GSElevator first launched, I followed it for a while, but soon thereafter unfollowed. Some of it was funny — very funny — but it read less like overheard true conversations, and more like what someone imagined would be overheard in a Goldie elevator. I hadn’t thought about it until a reader…Read More

Category: Corporate Management, Humor, IPOs

Who’s a Daily Facebook User? Anyone who clicks “Like”

I have been arguing that $100B is rather rich for Facebook. Perusing the S1, and discussing this with Bloomberg’s Dave Wilson has further confirmed this. Why? It has to do with what they consider a daily or monthly “user.” Indeed, this is extremely significant, because the excitement about Facebook’s reach and user base is driving…Read More

Category: IPOs, Technology, Valuation

IPOs: From Netscape To Facebook

In case you were unaware, IPOs are terrible investments — at least most of the time. The lottery ticket dreams keeps hope alive that this next one is going to be a giant winner. Hopes are pinned on the giant Facebook IPO, coming out at an expected 100 X earnings and 30 X revenue. Its…Read More

Category: Investing, IPOs

FusionIQ’s Ritholtz on Facebook IPO, U.S. Economy

Barry Ritholtz, chief executive officer at FusionIQ, talks about Facebook Inc.’s initial public offering and U.S. weekly jobless claims. Ritholtz speaks with Betty Liu and Dominic Chu on Bloomberg Television’s “In the Loop.”

Feb. 2 (Bloomberg) -

Category: IPOs, Media, Video

Facebook IPO by the Numbers

From Statista via Mashable: (some of those Statista numbers are wrong. Facebook 2011 revenue was $3.7B, not $4.2. ad revenue $3.2B, not $3.8B)


click for the rest of the graphic

full graphic after the jump

Read More

Category: Digital Media, IPOs, Web/Tech

Facebook Valuation Formula

From the always clever Limericks Économiques: Facebook is valued at plenty By Wall Street’s high-tech cognoscenti, Based on 1 billion friends Times $5 each, then Times the IPO multiple, 20. Delightful!

Category: Humor, IPOs

Great question from WSJ’s DealJournal: > Do you spend more or less time on Facebook now than you did a year ago?

Category: IPOs, Web/Tech