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This is just my personal opinion and I'll be the first to admit that I'm conservative with my money. That said, I think that a bet on Facebook's growth might be overreaching. 1. Facebook's profits are declining (by 12%). Revenue is up 43%, but revenue isn't what counts - profits are. Likewise, 43% isn't such an amazing increase. By contrast, Apple's profits are up 117% and their revenue is up 73%. Apple's P/E ratio is around 13. Even if you consider Apple an outlier, Google's profits are up 14% with revenue up 29% and a P/E ratio of around 19. So, in terms of growth, it doesn't look like Facebook is there. They don't seem to show a stronger growth pattern than companies that are trading with much more favorable P/E ratios. 2. Facebook could be a fad. While I think Facebook has much better engineering chops than AOL, Friendster, or MySpace, it's definitely possible that they could suffer the same fate. In a certain light, Facebook is a club and sometimes the crowd up and moves somewhere else. I have to emphasize that I really respect Facebook's engineering and that such strength and willingness to confront hard problems will help them a lot. Still, I remember when everyone used AIM and now everyone I know uses GTalk. 3. Facebook hasn't found a way to monetize users well. I read some estimate that Google earns 10-20x more per user. Facebook is at 900M users. They aren't going to justify such a high price by adding users. They need to figure out how to monetize them. Now, they may very well do that. If you think they will, it might justify that price. If Facebook could get its monetization per user up to Google's level, they would certainly justify that price (shrinking that P/E ratio to 8 or maybe even better). However, that's a big "if" (at least for me). I think that people betting on Facebook are betting that they will be able to figure that problem out. 4. Their mobile app doesn't have ads. To stay in the same place, they need to be able to monetize mobile as well as they've monetized their site. 5. People might become wary of Facebook. I hear a lot more ramblings about privacy and Facebook than privacy and Google. Maybe people feel more confident about Google being able to make money off of them through more traditional means. Maybe people have just felt Facebook trying to force them to be more open for their own ends several times before. 6. People are gunning for Facebook. Facebook has something that isn't making a ton of money, but people really want to be in that space. That's not great. Apple has a bunch of people that want in on mobile, but it's somewhat limited to major players - making a phone takes more than making Instagram in terms of time, money, and diversity of skills. Plus, Apple's making great money. 7. I think that Facebook isn't the best positioned for cool, new, useful things. I think that the mobile telecom industry is going to be flipped upside-down over the next half decade or so with LTE and then LTE Advanced. It's possible that a mandate for neutrality toward VoIP will come down. Google will be in a great position owning Android and GTalk. Apple has the iPhone and FaceTime. Even Microsoft has Windows Phone and Skype. Google and Apple are both working hard on mapping and other geo problems. While I like being kept up on random things in acquaintances lives, GMail and my phone know who I really interact with. -- To be fair, I do think that Amazon is overvalued. While their revenue has grown well, their margins and profits haven't. Frankly, unlike social networking, retail isn't going to be a single-source industry in the future. Amazon will continue to have to compete against other retailers and they may face better organized competition in the future. Plus, when a company can increase its revenue so much and not have its profits go up, it just seems like a business model that relies on such thin margins that an attempt to thicken them leads to great loss of business. -- Again, Facebook very well might justify that price. If they're able to greatly increase their monetization per user, that P/E ratio could drop fast. However, currently people are speculating that social doesn't lend to good monetization. We're also seeing that investors are willing to throw money at this with no monetization strategy (ala Instagram) and that means that Facebook isn't going to be on easy street with the space to itself. Frankly, it isn't always about whether a company will justify a price. It's sometimes about having other options. Apple is trading at a P/E ratio of 13. If we assume that companies hit an equilibrium around 15 for slow-growth companies, Apple could get 15% earnings growth per year and return a little more than 15% per year in the stock market to get to that 15 P/E ratio. By contrast, if Facebook increases earnings 50% per year for 5 years, their P/E ratio would be 17 assuming absolutely no increase in Facebook's share price. To kind of put that growth in perspective, if Facebook's user base grew at that rate for 5 years, everyone on earth would be on Facebook. So, Facebook has to figure out how to increase monetization per user by a good deal, fend off challenges from very smart people, make sure user apathy doesn't happen and that people don't go somewhere else, and make sure that it can adapt to mobile and other cool new things. I'm not saying they won't. I just think that there are places I could put my money that are smoother sailing. Facebook hasn't given me a plan of how they expect to increase their earnings: Zuck has even said that earnings aren't really their concern. In some ways, he's more interested in running a good site that people like - and that's good for me as a Facebook user. However, if earnings don't hockey-stick, that would leave me in an unfortunate position as an investor. Facebook is sustainable in that they're a profitable business. That doesn't mean the share price won't tank at some point if people begin to believe that Facebook will merely remain sustainable rather than hockey-sticking. Zuck is exiting this IPO with $1B in cash. It doesn't matter if Facebook tanks from here on out and he might be happy to see it remain more popular rather than more profitable. I think a lot of companies can operate that way - Patagonia does - but I don't think that's the ethos of those getting in on this IPO (even if it may be Zuck's). I'm indifferent toward being proven wrong - I'd rather risk less and this is just an opinion. I respect Facebook's engineering and they've done a much better job than those who have come before as well as open-sourcing some great stuff. Facebook just hasn't shown me a plan for increasing profits. Without that, I wouldn't bet on that happening - and that's what people are betting on. Likewise, while Amazon has shown me how they intend to continue getting more popular, they haven't shown me increasing profitability. Again, Bezos is interested in creating a great customer experience that I appreciate as a customer. For the most part, I appreciate Facebook - it's reliability, consistency, speed. But that isn't the only thing I'm looking for in an investment - certainly not an investment with such a high P/E ratio. If Amazon's P/E ratio were 8, I would care less about a plan to increase profits - being able to keep them relatively level would be good enough. The same applies to Facebook. And I'm not saying that it won't happen. I just don't yet see how and I don't think Facebook does either - I think they're hopeful that they will figure it out later. They definitely could. I just prefer something more concrete. |
Except Amazon is killing it in the cloud. I don't think looking at profit margins is fair when you have a company that is heavily invested in R&D in a known, growing market.
I think they're well aware that the cloud market is going to be dominated by one or two major players, and are investing quite heavily in an 'amazon land grab' to quote Joel Spolsky.
It won't matter if you have 50 retailers competing with amazon when the majority of them are running on EC2...