Cash Burn: Why Facebook Will Have to Sell Out to Microsoft

 |  Includes: MSFT, NWS
by: TMT Analyst

I was listening to NewsCorp's (NASDAQ:NWS) dismal earnings report last week, in which operating income declined 47% YoY due to weakness at all divisions except Cable, and in which CEO Rupert Murdoch declared that the worst of the economic decline is over. FIM revenues, where MySpace's numbers are reported, declined 11% YoY due to 16% lower advertising revenues, due to a reduction of branded and performance based advertising at MySpace.

I have long held that social networking sites will be a challenge to monetize and then a greater challenge to drive to significant profitability. In my NewsCorp model, I have MySpace generating about $630 million in revenues for the year, about half of that comes from Google's (NASDAQ:GOOG) disappointing search deal. Most reports have Facebook generating about $300 million in revenues in 2008. My quick slight of hand calculations, so to speak, has Facebook's revenues growing about 50% in 2009 to about $440 million.

According to the Compete data graphed below, Facebook's domestic unique visitor traffic has been on a tier, jumping 250% in April 2009, while MySpace's domestic traffic declined 9% YoY and has declined every month for the past year. My guess is that MySpace's enormous traffic is shifting to Facebook.

click to enlarge

That's all good news for FaceBook. As shown by the following graph, FaceBook's page views have grown enormously, as everyone and their daddy is now on FaceBook. My 70 year old dad recently requested that I add him as a friend.

But all that glitter isn't necessarily gold. My back of the envelope analysis shows that those billions of page views are digging FaceBook into a big hole and they will likely have to raise a significant amount of capital this year. My calculations show that FaceBook will burn through approximately $250 million in cash in 2009.

Good luck to FaceBook, but those numbers will make it difficult for them to go public in 2010 and they will have to sell out to Microsoft (NASDAQ:MSFT), in my less than humble view.