The long-awaited Facebook IPO finally arrived on Friday of last week. The stock opened at $42.05. With 2.74 billion shares outstanding, that gave Facebook (FB) a market capitalization of $115 billion.
But it ended up closing on Friday at $38.23 ($105 billion market cap).
Then on Monday it opened at $36.53 ($100 billion). and closed at $34.03 ($93 billion). Yesterday (Tuesday) it closed at $31.00 ($85 billion).
How low will it go? How much is Facebook worth?
SEC Filing Document
I looking at the Facebook SEC filing document.
Advertising. Our advertising revenue is generated by displaying ad products on our website. Advertisers pay for ad products displayed on Facebook, either directly or through their relationships with advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. We recognize revenue from the display of impression-based ads on our website in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad appears in pages displayed to users. We recognize revenue from the delivery of click-based ads on our website in the period in which a user clicks on an ad.
Facebook gets it’s revenue by selling ads on its website. They are selling ads by impression and also by click-through.
Anyone that is a member of Facebook, probably gets daily email alerts from Facebook. They send out an alert that they have updates to look at. When the user visits Facebook, sponsors are charged for impression ads, whether the user actually looked at the ad or not.
Now in my experience, anyone paying for ads by the impression is overpaying. You can buy one million impressions and have zero clicks and zero sales. Websites pull tricks to increase the impressions, like spreading out an article over 8 pages. Eventually, those sponsors will realize that they are throwing their advertising money away.
Facebook Data
From the SEC Filing document, and some simple calcuations, for the latest period ending Mar 31, 2012:
| Statistic | Value | Date |
|---|---|---|
| Daily Active Users Worldwide | 526 Million | as of March 31, 2012 |
| Monthly Active Users Worldwide | 901 Million | as of March 31, 2012 |
| Quarterly Advertising Revenue Worldwide | $872 Million | quarter ending Mar 31, 2012 |
| Advertising Revenue Per Monthly Active User | $0.323 | quarter ending Mar 31, 2012 |
So there are 526 million users per day but only 901 million per month. That indicates that the same users returning to the site over and over, on about 17 days per month, on average. They may visit multiple times per day, but I can’t tell from the data provided.
With $872 Million quarterly revenue, that’s about ($872/3)/901 = $0.323 per active user per month. At 17 visits per user per month, that’s 1.9 cents per visit, or $18.98 per 1,000 visits.
In my experience, this is high. I think a more typical number for a website is around $2 or $3 per 1,000 visits. Of course, this number will vary from website to website. It depends on the click-through rates (CTR) and how much per click sponsors have bid on the add spot.
Sponsors selling big-ticket items, like financial services, can afford to pay more per click than sponsors selling low-priced items, like t-shirts.
The Click-Through Rate (CTR) determines how many visitors actually click to view the sponsors message or offer. For an average website, CTR might be around 1% or less. My guess is that a social media website like Facebook would have a below average click-through rate, perhaps as low as 0.1% click-through. I’m sure this is a closely guarded secret at Facebook, and could be their Achilles heal. The dirty secret might be that no one sees or clicks on ads while on Facebook.
The high $$ per visit figure for Facebook is probably explainable by the impression-based ads, which I think is a good way for sponsors to throw away money. If the sponsors ever wise up, they will stop buying impressions and Facebook’s $$ per visit would come down.
Facebook Growth Potential
For the sake of argument, let’s assume that Facebook can continue getting 32 cents per user per month. Right now they have 901 active users per month. They are targeting 2 billion internet users. That means that they can only grow user base by 2.2x and they will have every internet user in the world. After that, they can only grow as fast as the number of internet users grows.
The implication is that their advretising revenue can only grow from the current 872 Million per quarter to 1,918 billion per quarter, or 7.6 billion per year.
At 30% profit margin, that would imply a potential $2.3 billion in earnings from ad revenue. Since that is the limit to growth, at that point they should have a normal PE, let’s say 15x. Facebook would be worth $34 billion based ad revenue. With 2.74B shares outstanding, that would be about $12 per share. There’s a long way between the current $31 per share and $12 per share.
Personally, I would discount Facebook stock more because their revenue stream is very risky. In five years, Facebook may end up like AOL or mySpace, with some new website getting all the attention and visitors. Bruce Williams often remarked that the public has the loyalty of an alley cat.
