Facebook: Why Not $100 Billion?

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 |  Includes: AOL, GOOG, YHOO
by: Ari Kuchinsky

Earlier in the week, I read articles discussing Facebook's $100 billion dollar valuation. There are two ways to look at Facebook. The glossy view is that Facebook has 500+ million users and that the company controls a significant share of Internet traffic. This traffic will be monetized and make it the largest advertising and marketing company in the world.

The not-so-glossy view is that Facebook is nothing more than a repackaged version of America Online (NYSE:AOL). At its peak, America Online had 30 million paying subscribers and a market cap of $240 billion. While Facebook has a lot more subscribers, each user is not paying $15-30 per month. Not only does a subscriber model provide real revenue, but it means you have 30 million paying users. People paying for a service are real users. In contrast, Facebook is free and we therefore have to question how many of the 500+ million are actually real users.

Facebook-AOL Comparison

Isn't Facebook just an evolved version of AOL?

  • AOL keywords v. Facebook pages
  • "Become my AOL friend" v. being a Facebook friend
  • AOL mail v. Facebook mail
  • AOL gaming v. social gaming
  • AIM chat v. Facebook chat

Facebook-Google (NASDAQ:GOOG) Comparison

We can talk about users and social graphs, but ultimately Facebook is a marketing and advertising company. All of the features and utility the service provides is a means to collecting advertising dollars. According to E-Marketer, Google's share of online advertisements in 2011 is 43.5%. Facebook is 7.7%. Facebook has not even eclipsed Yahoo (NASDAQ:YHOO) (11.9%). In 2012, Google's share will grow to 47.6% and Facebook's share will grow to 8.8% (both in part at the expense of Yahoo).

Not only is Facebook a small player compared to Google, but it has not even eclipsed Yahoo -- a company valued at $20 billion. Granted, Facebook has a better trajectory than Yahoo but you are paying 5x more for the hope of growth.

Google IPO-Facebook IPO

The Facebook IPO will be four times the valuation of Google's $25 billion offering. Let's not forget what Google accomplished. Google transformed the web and advertising. Google's pay-per-click advertising caused an epic shift from conventional advertising mediums to online advertising. Whether it is good or bad, Google created the "link economy."

Let's not focus on Adwords, Android, Google Docs and other Google products. All of these products have one common goal. These products make Google the largest advertising and marketing company in the world. Will we be able to say the same about Facebook? Will Facebook as a product make it the largest advertising and marketing company in the world? Isn't Facebook really just another advertising company chasing Google? Putting the service provided aside, Google essentially invented online advertising. Google created a new revenue stream. Facebook is a different product than Google, but as a business model it is chasing the same dollars.

Google at $25 billion offered buyers of the IPO a ton of room for growth. Travelers (NYSE:TRV) today is a $25 billion dollar company. Even back in 2004, it was quite plausible to believe that Google could be larger than Travelers. But when the valuation starts at $100 billion, it is more difficult to make money. Intel's market cap is only $115 billion. Cisco's market cap at $82 billion would be significantly less than Facebook. McDonalds(NYSE:MCD) is only an $84 billion dollar company. Once we start talking $100 billion valuations, we are talking big money. To get a double in Google, the company only needed to turn into a Home Depot (NYSE:HD) ($54 billion). To get a double out of Facebook, it has to turn into a $200 billion company. There are not very many $200 billion companies.

Google itself only has a market cap of $163 billion. To make big money on the IPO, Facebook will need to be bigger than Google. Other interesting comparisons include GE ($197 billion), Walmart (NYSE:WMT) ($182 billion) and IBM ($197 billion). And all this has to happen just to get a double.

Facebook v. Other IPOs

At least with some of the other IPOs out there it is possible to make money if the vision of the company plays out. I call it the dream factor. For example, LinkedIn (NYSE:LNKD) is a $7 billion dollar company. If everything goes right for it, getting a double or triple from its current price is possible. If it triples, it would still be only worth as much as Yahoo. I'm not endorsing LinkedIn or any other stock, but at least it has the dream factor.

More Like Google or Yahoo?

At $100 billion, the risk-reward ratio for buying into the Facebook IPO is unfavorable (and retail buyers may pay much more than that). Personally, if I am taking the risk of buying into an IPO, I want a lot of upside potential. When you start at $100 billion, getting a double is tough. And this assumes I'm wrong that Facebook is really just an evolved version of AOL without the market dominance of Google and without the subscriber base AOL had. If I'm wrong, getting to $200 billion will still be tough (assuming normal market conditions). If I'm right, Facebook may be much more similar to Yahoo ($20 billion) than Google ($163 billion).