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On Facebook Valuation
After more than a 50% drop in value, I’d like to jump in the Facebook conversation to explain why I believe that there is significant upside potential for Facebook shares. At the present time, there seems to be concerns on the large amount of shares that will be unlocked soon, but more fundamentally there is a cloud of doubt on: 1. how Facebook can monetize mobile traffic, 2. other sources of revenue available, 3. migration to other social platforms. The bottom line is, can Facebook generate loads of cash and sustain growth?
To address these concerns, I’d like to first cancel the first one – which is the 2 billion shares that will be outstanding. Although this represents a short term challenge of basic supply and demand, it does not affect the fundamentals of the company, which will be the ones who will dictate Facebook’s valuation in the long term. Thus, let us focus on the other issues at hand, which is how they will make money, and how they will retain control of the social layer.
To understand my point of view on Facebook’s social layer and what it represents for the company, you can see here and here. Basically, Facebook has a monopoly over the Internet’s Social Layer. Their 900 million member personal data makes them the most formidable partner to marketers trying to reach their customers online. So the question is, Can someone else build a competing product that is capable of amassing such a large amount of personal data from nearly 1 billion people? If your answer is yes, that still doesn’t erase the fact that Facebook still owns the personal data as well, which would allow them to monetize it. Therefore, even if some other social networking site can get people to share so much personal data with them (which I doubt), the time it would take them would give Facebook a considerable advantage over that competitor. On the other hand, if your answer is no, the value of Facebook is considerably higher than it is today because of what they will be able to do with that data that no one else will.
Will traffic for Facebook’s desktop site sink? Yes. Will traffic to its mobile app become higher than its desktop site? Yes. Will traffic to Facebook properties begin to decrease? Very likely. Does that matter? For its revenue, not much and here’s why. Investors sold Facebook shares after seeing Facebook’s first quarter report, where revenue growth from display ads decreased. This raised a red flag in Facebook’s ability to sustain their growth and valuation. Since then, the company has continued a downward slope to a market cap of around $50 billion. However, looking at display ad revenue from Facebook’s site as a measure of the company’s capacity to generate revenue is a mistake. I believe that this measure will continue to remain weak in comparison to other sources of revenue (although it will continue to rise), but it won’t matter as much for Facebook’s bottom line in the long term than other products.
Forget games, forget Zynga and its Farmville and all those other fickle products. Facebook’s value is in its ability to package all of its members’ personal data into an external marketing engine directly competing with Google Adsense. In 2011, Google generated $10.4 billion in revenue from “Google Network Members’ Websites”. Anyone familiar with the product will know that it is a contextual advertising marketing platform whose principal source of targeting relies on an algorithm that matches relevance of a web page and an ad, and can limit it to a specific geographical sector. The system allows anyone to create these ads in minutes, and is responsible for about a third of Google’s revenue. This will be Facebook’s greatest source of revenue if they are able to bypass privacy obstacles.
Google knows they need more personal info. They have plugged their social networking site Google Plus into every single product they have in hopes of preparing for the competition that Facebook will create. Google Plus continues to fail at this, and despite claims of high traffic numbers for Google Plus, we all know that our society “likes” (Facebook) instead of “plus” (Google). In other words, people visiting an external website are far more likely to click on Facebook’s “like” button, instead of Google’s. Everytime a user “likes” an item, Facebook’s value increases. As Facebook continues to dominate this personal data storage, their Google Adsense competing product becomes much more valuable than Adsense.
The product I am talking about doesn’t exist, but it has to. Facebook’s Adsense will be very similar to their internal ad engine, except that it will allow marketers to advertise anywhere in the web. Facebook will be able to command much higher rates than Adsense, because Facebook will allow them to target their customers in more detail. For example, a marketer could advertise to people that are celebrating their birthdays, people who are engaged, or to people who like Coca Cola. These are just very small examples of a much more elaborate campaign that can be tailored, given Facebook’s massive personal information.
Commanding a greater amount of money for these campaigns would allow Facebook to also share more money with the webmasters hosting the ads, which would be an incentive to drop Adsense in favor of Facebook’s product. That move could bite in directly into Google’s Members’ Websites revenue. Growth rate in that line has been a healthy 20% year over year. If marketers would be willing to pay more for Facebook’s targeted ad campaigns across the entire web, it could quickly become a $10 to 15 billion revenue source in the next year or two, which is five times Facebook’s 2011 revenue. Attracting more advertisers with this product would also benefit its internal property revenues, as more of their internal impressions could be filled and perhaps at a higher price.
If you believe the product I have just talked about will not exist, then a $50 billion market cap is probably right. However, if this product is launched, then the current valuation appears significantly undervalued. The more likely question is not if they will launch this product, but when. And when they do, it is my belief that Facebook and Google shares will be affected inversely.
All these considerations are for a term of 1 to 3 years. For the short term, uncertainty about the company’s direction and the large amount of outstanding shares could put some downward pressure into the stock, despite its fairly low valuation. For the longer term, as technology progresses, other significant sources of revenue can be mined from Facebook’s personal information field. For example, as web browsing transfers to mobile platforms, the combination of geographic location with personal preference data opens up the possibilities for other types of targeted advertising. To see a basic explanation of this, you can read the article I wrote on mobile ads. On the other hand, Zuckerberg’s voting power dominance of the company is a risk issue that can make investors uneasy. His ability to communicate his vision and remain relevant as technology changes will be a determinant factor for the company’s long term progress.
*This article is not financial advice, nor is intended to recommend the purchase or sale of any stock or investment. Please consult your financial advisor for investment guidance.
Acquisition Opportunity for Yahoo or Google- Marchex
Last time I analyzed CNET’s individual assets, the company was acquired 4 months later. Now, amidst the current economic nightmare, there is a fresh new opportunity to grab a gift – Marchex (MCHX). Yahoo, who’s recent conflicts have left many asking for Yang’s head and who’s stock has lost almost 50% since failed negotiations with Ballmer, has a small opportunity to vindicate themselves.
Of course, there’s also Google who needs to continue increasing their revenues in order to support their generous stock PE. Although I would insist that this is a more logical acquisition for Yahoo! to build themselves into a more attractive position for Yahoo! to be acquired, possibly still by Microsoft.
So, what does Marchex bring to the table?
High quality traffic and prime Internet Real Estate.
By its own, Marchex is priced slightly below their current value. However, when you take Google or Yahoo’s advertiser base and traffic sources and fuse it with Marchex’s high quality domain portfolio you get a multiplier effect.
Marchex has made two brilliant moves:
1. Spanish domain portfolio acquisition
This portfolio contains over 100 of the most attractive Spanish domain names and was calculated to generate more than one million unique visitors per month. Of course, these are mostly visitors coming straight to the sites, because of type-in traffic. Take a look at the jewels:
mujer.com (women.com)
fotos.com (photos.com)
deportes.com (sports.com)
salud.com (health.com)
peliculas.com (movies.com)
mascotas.com (pets.com)
futbol.com (soccer.com)
cocina.com (kitchen or cook.com)
tarjetas.com (cards.com)
dietas.com (diets.com)
computadoras.com (computers.com)
The whole list is found here http://www.emediawire.com/releases/2007/5/emw527846.htm
The value of these domain names are like a slow curve that quickly accelerates exponentially as the Spanish market (Spain, Mexico, Caribbean and South America) online advertising solidifies. One must understand that this market has been extremely slow to develop, mostly because of the number of computers available in each household and lack of understanding from old school marketing executives. However, the panorama is changing quickly and will fuel advertiser dollars to the ‘net.
The Spanish domain portfolio could be easily worth $500 million to $2 billion in a 5 year window, depending on the development of all these domain names into fully usable content and social portals.
The second source of value in Marchex is their 2004 acquisition of UltSearch’s domain portfolio.
In this portfolio, there are over 100,000 domain names of high search traffic value. There are also a few generic jewels in the mix like beijing.com, debts.com, and remodeling.com.
It’s hard to value the whole portfolio and I suspect that most of the names would probably not be of any significant worth. However, assuming even 1% of the names are of the quality of debts.com and beijing.com would make the portfolio highly attractive.
I wouldn’t doubt that this portfolio had at least $100 million in value (Marchex paid over $150 million a few years ago for the portfolio).
Finally, someone over at Marchex decided to accumulate zip code domain name. Wrap them up, put a bow on top of them and sell it for a few million to some telephone company still figuring out their online strategy. I’d also garage sale the auto content generation technology.
Marchex is currently priced at $300 million. Year-to-date they are down almost 30%. This is exactly how much it is worth.. a 30 to 50% premium on its current price.
Idea on Spam Reduction
This is an idea that just occurred to me on dealing with Spam from a large email provider, such as Gmail, Yahoo Mail or Hotmail. Back in 2005, I had written a post on how effective Gmail had become on spam and how they could use that understanding to offer an attractive option to domain owners to have mail on their domain (which as we know now is a Google offering).
Currently, Google’s Gmail is ideally positioned to benefit from a largely ignored market of e-mail outsourcing. To that effect, the implementation of effective spamming tools, together with Gmail’s clean and organized web-format would benefit many individuals. More importantly it would benefit businesses, both large and small, for which Gmail could handle all of their e-mail traffic, hosting and storage needs.
The question then becomes how to extract the maximum value out of move to significantly reduce spam? To maintain Gmail’s current business model and improve their companies image Google should still maintain their free individual email accounts. However, to address the business communities’ needs for an efficient anti-spamming email service, Google could offer a subscription email solution.
Technically this would involve Google setting up private label paid accounts where companies and individuals could set Google as their mail server and view their e-mails in a Gmail’s online interface or through the clients PC based email programs; such as, Eudora and Outlook. (read more)
Despite advancement in this field, spam reaching our Inbox is still much higher than desired. Following on that note, I believe that an effective spam blocking tool could actually be your users. In a large enough pool, employing your users in a style similar to Amazon’s Mechanical Turk, spam filtering could actually make your spam machine more precise in reducing spam. Here’s how I envision it:
- Identify the spam reporting activity of your user base
- Separate the x% of most active spam reporters within your user base
- Analyze your active spam reporting group’s precision in actually reporting general spam, rather than personal specific mail which they report as spam incorrectly and filter out those who use the spam reporting tool incorrectly.
- Now you should have a clean spam reporting pool (SRP) of users at a 9x% confidence level
- Plug in those users who you identify from the SRP to be online, into your spam filter engine so that emails with a high spam score that are not high enough to be discarded in the automated process are first sent out to your online users in the SRP.
- You should then receive a percentage response of Spam from these users that would tip over that email message into the Spam pool, before it is sent out to the general population.
This method can be most effective from a large user pool like that of Gmail, Hotmail or Yahoo Mail, because many Spam efforts are directed to the email provider domain (gmail.com, hotmail.com). Gmail is in an even more advantageous position, given their management of Gmail for your domain, which could serve as an extra window on spammers focusing in a more heterogeneous domain attack.
Rafael Sosa's Weblog 