Friday, December 02, 2011

Regarding Facebook's Valuation

The Wall Street Journal has published several page one articles recently concerning Facebook's putative $100B market value. I had to go to the Journal's site to confirm Tuesday's edition's lead which contained that number, it seemed so staggering. Facebook is looking to sell just 10% of that value in its IPO scheduled for early next year.

Much is being written regarding the appropriateness of that valuation. I'm not in that business, so I'm not going to argue over billions.

What I am, though, is a strategist who has learned to apply that type of critical thinking to business and equity management.

Among online ventures, I would agree that Facebook should be at the upper end of the valuation scale. Here's why.

Zuckerberg's- and his famous twin collaborators- big idea was initially simply replacing the once-popular college paper 'picbooks' or 'facebooks,' which I first encountered as a graduate business school student at the University of Pennsylvania, with an online version. From there, the rest is history.

Like Google's Brin and Paige, Zuckerberg and his colleagues invented one thing, which just happened to be a popular 'app' for which, in time, advertising was a natural fit. For Google, the search results were just begging for nearby ad placement. And the best part was that, unlike passive television, active searches allowed Google to sell literal terms to advertisers, thus making specific buyers much more valuable.

Facebook has the same characteristic. By developing an application which induces people to spill their guts about their lives onto a webpage, it's tailor made for associating advertising with these pages. And because of its communal nature, it multiplies that value through the various platinum-plated, self-organized, genuine communities of great and frequent interest.

For a marketer, it's a dream come true. Instead of searching for, say, early adopters, you have the ability to link to the close friends of one by virtue of the site's very nature.

How can that not be valuable? Or, as the late Steve Jobs might say, 'insanely' great and valuable?

And because Facebook is simply a generic self-expression tool, it's potentially usable by every living person on the planet, and maybe, in the future, the dead, as well, in absentia. So the accessible market is literally the entire global population that has web access.

Search engines have come and gone. Who even recalls Webcrawler or Lycos anymore? But, like telephony or the mail, social networking technologies become more valuable and monopolistic by their very nature. That's why MySpace became such a money sink and, ultimately, loss for NewsCorp. Second place in social networking is nowhere. Especially when the market share leader is so far ahead as Facebook is.

Thus, while Linked-In is, by comparison, relatively narrow, with its business- and skills-focus, and Groupon is deal-specific, Facebook is perhaps the most common of social networking applications. It probably does belong, if not now, then eventually, in Google's league, which is now about $200B.

Stunningly, that's only twice what Facebook's IPO-imputed valuation. Barring gross mismanagement, I think that sort of valuation range is quite reasonable and appropriate. In the future, who knows by how much that could increase?

From an equity management perspective, of course, that doesn't mean my portfolios would include Facebook in the future. Google never made it into the portfolio. In the early years, its valuation was simply too rich, relative to its growth rate. By the time the valuation had become reasonable, according to my selection criteria, its growth, too, had moderated. Perhaps Facebook will undergo the same dynamics. It will be interesting to see.

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