Is Facebook a bubble?

What do you think about US government bonds? 2% income per year and an absolute guarantee that nominally you will have your money back, as the government can print as much money as it needs. At current moment no more than 1/3 of US bonds are purchased by investors. The rest are bought by FED... Now let's look at Facebook Inc. and its bombastic IPO. According to some unofficial trade practices (shares owned by insiders traded privately out of stock exchange) current value of this company is about $100 billion. But what do we really have for this money?

The 2011 revenue is $3,7 billion, and the profit is $1 billion. The company is in very risky and competitive business, does not have guaranteed revenue and has no cleared focus what will be its main business. Most of Facebook services are free. The general expectation is about great ad-incomes, that still does not exist. Facebook has no concept of monetizing the registration or other similar activities. It is very doubtful also if generally these services are monetizable.

It is very easy to create a free Internet service for something. People like free services and use them. But someone must pay for this, and this is the real challenge. The fact that you are more successful than other in making free services, does not make you a reliable businessman.

The fail of initially successful free Internet projects is something that we have seen much times since the IT era started. We all remember the first (pre-Google) search engines, free mail services, dating sites and even fantastic on-line bank and financial projects. Most of the pioneers no more exist. Even the ones that exist do have serious problems.

Yahoo was once a search dinosaur, mail leader and general portal. Now is a company in trouble. Yahoo is still delivering large number of free services and has strong market shares in most of them. But Yahoo does not have income. Even in search battle Yahoo is still a strong player with 15% in USA. These are millions of searches every day. But only searches, not dollars... Or at least - not enough dollars...

Yahoo once also had a magic and dreamy IPO...

So let's look again at Facebook Inc. About $1 billion in profit and $100 billion preliminary market capitalization. What is this?

It's a bubble...

It is more wise to invest your money in US government bonds than in Facebook shares. You will have higher income and lower risk. And this is if we assume Facebook will pay all its profit as dividend. In this case we will have 1% return on investment. 1% profit on shares that does not guarantee stable price (in comparison with government bonds that guarantee not only the interest, but also the initial invested sum). But if Facebook does not pay all profit as dividend, then the income will be lower...

Someone may oppose that an investor can profit from increases in share prices on stock exchange. Yes, this is possible, but only if this price-rise is due to working business model and real revenues and profits. An expectation of share-price-rising without this is an expectation of an investor in pyramid (Ponzi) scheme. We don't care of business and profits, we just believe the shares will go up, because Facebook is a great idea and Marc is a great young man... :)

Creating a real business model in Internet is not an easy job. Less companies do succeed.

Let's look at Google and at ad-market, that is the big hope of Facebook. Generally the ad-market is already overcrowded with businesses that expect to make money of this. Not only big businesses, but also millions of small site-owners, bloggers and freelancers hope that they will make money of ads on their sites. We must not forget also the so called old media, that relies mostly on ads, and that intensely is developing its Web presence to take its share of on-line ad market. So the market is already full with companies, sites and traffic. This is not a new market that just expects Facebook to come and take the money.

Facebook is not a new way of making money! Facebook is just a new way of making traffic. This is the most important point in Facebook market reality. It is not a new business. It is the old well known ad-business. It is just a new traffic-generator. A new way of attracting surfers attention.

But Internet is full of different ways of attracting surfers. And Facebook attractiveness is not enough to become Facebook cash generator.

So what is for instance Google doing? They also have a great traffic generator (in fact the greatest by now). But how does Google make money?

Google sells ads and shows them together with search results. But Google makes something more - it harvests not only its own traffic, but also the traffic of millions other's sites that are attracted to participate in Adsense program. In fact, Google makes money not only on search, but also on reselling ads. Google is well known as search giant. But in money Google is in fact a pay-per-click giant. Yes, it is just this very interesting system of distributing ads, that existed even before Google was established. But Google improved it, combined it with the search technology and brought the best result for small site owners and small advertisers. And this is the Google's success. Not only the search, but also the PPC system of Adsense/Adwords. Yahoo and Bing also have great search engines, but lack the Adsense/Adwords cash generator.

So if we suppose that Facebook creates as much traffic as Google, even if this happens, this will not mean "dollars"... :)

So where is the real value of Facebook?

I think, it is about $5 billion. This means 20% income in investment. For high risky business as IT and Net, and for a company that hopes to profit from overcrowded ad-market, I think 20% return on investment is a good compensation. With $1 billion profit this means $5 billion market capitalization. Every value higher than this looks more like a bubble than like a common sense.

It is really possible for Facebook to have higher profits in future. OK. When this happens, the company value will increase. But based on the experience of other technology "stars" that dowsed, it is also possible the profit to go down. This is the main principle of business that is good being always remembered...

So, is Facebook a bubble?

With $100 billion overall value I think, it is really a great bubble...


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