With more signs that the younger generation is fleeing Facebook (NASDAQ:FB), including the recent UK study suggesting the leading social site is already dead to teens across the pond, it might be time to consider the proper valuation as Facebook becomes an Internet utility. Sure it has Instagram that is still hip, but in the social media sector it seems all but inevitable that a utility type service is the future for Facebook.
The good news is that the future could provide the next Yahoo (NASDAQ:YHOO), while the downside is always lined with the remains of MySpace and others.
More Left To Monetize?
Even amongst the positive investors that admit the teen issue, the bullish theory continues to revolve around monetizing the existing user base to a larger extent. The embarrassed teens in the UK raise a major red flag on that theory and even Instagram down the road. Remember that the monetization numbers are greatly skewed towards the US and to a lesser extent the UK. See the slide from the Q3 '13 investor presentation below:
What sticks out like a sore thumb is the death of a user base before the real monetization machine is released in the UK. The average European user generates only 40% of the revenue that a US user does. The promise that these European users will eventually monetize to the same rate won't matter if the users are on SnapChat and Twitter (NYSE:TWTR). In essence, Facebook spent all this time and money to cultivate a global user base that is already wilting. The impression provided by management all along was of a teen user base fully engaged; therefore, the time spent on Facebook couldn't increase. In reality, teen usage is disappearing fast.
Value Of A Utility?
One thing the study provided was a willingness by the teen users to remain connected to the family via Facebook. It doesn't take much of a stretch to envision teens remaining connected to parents on Facebook to prevent a further connection via Instagram or Twitter. In that essence, Facebook stays a viable service providing that utility of keeping people connected. The growth days will be over and the peak multiples will compress.
Using the Yahoo example, the value of a utility could be something less than the 3x the enterprise value to revenue multiple. The below chart showcases how Yahoo peaked back at the end of 2005 while revenue per share didn't peak until around 2009.
Investors that are extremely bullish on Facebook should note the progression of Yahoo in the above chart. The valuation of Yahoo peaked at around an EV of 20x revenue towards the end of 2004, or nearly five years before revenue peaked. Within three years, the stock plunged from nearly $45 to $10, all while revenue continued to grow.
The stock has only recently rebounded due to the Alibaba investments seeing significant increases in value on an IPO speculation.
Implied Facebook Value
With teens fleeing the social site in the UK before even being monetized, the move could signal a revenue peak in 2015 or 2016 suggesting a multiple peak already. The possibility even exists for a multiple peak as well. The below table calculates a valuation based on different revenue scenarios:
Based on the calculations, Facebook would only be worth $111 billion if peak revenue hits $20 billion and the stock is able to maintain an enterprise value of 5x revenue. In a more realistic scenario revenue peaks around $15 billion and the stock trades for around 3x revenue. In the later scenario, Facebook would have a valuation of $56 billion. With the stock trading at a valuation closer to $135 billion, investors could see a considerable collapse in the next couple of years.
Based on the Yahoo example, it's difficult to come up with a situation where Facebook is worth anything near the current market cap of around $135 billion. If the service continues to become embarrassing to a greater audience beyond teens (don't all social networks whether online or in public become that way?), it is very probable that usage will peak soon. Revenue might continue growing for the next couple of years due to monetizing existing users at higher rates. The scenario with Yahoo suggests that Facebook's stock is about to peak and wouldn't it be ironic if Facebook peaked at the end of the year similar to Yahoo.
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