By now the headlines ending in "Instagram" are starting to finally dwindle down. Facebook (FB) had finally given the bloggers and media something to get excited about when they scooped up the mobile photo-sharing app, Instagram, only weeks before they head out on an IPO roadshow in what looks to be the most anticipated IPO … well, ever. No company has ever had a more extensive reach at the time of their public offering than Facebook. The crown jewel of Web2.0 is marching down Wall Street with nearly a billion users in its shadow. It's implied market cap when it goes public? (Insert Doctor Evil Voice) One Hundred Billion Dollars.
The pundits say it's a sure sign of a market top. The market cap is unjustified by both their revenue and earnings. The multiples are simply too rich. Their growth is unsustainable. No one is clicking those damn advertisements! The bears make many compelling points, and very well they may end up being right. However, I believe many of these analyses are being made under the assumption that Facebook is a social network, and in the future it will make all of its money solely on advertising and collecting some of Zynga's scraps. I would like to take a different approach. An investment is a stake in a company's future cash flows, and in order to fully understand the potential of Facebook's future value, we must assess and identify future value drivers that the company can capitalize on. When you look at the "Big 3" tech titans: Apple (AAPL), Microsoft (MSFT), and Google (GOOG) they all shared the ability to innovate and expand on the business models they had when they went public. Thanks to the emergence of venture capital and the popularity of second market exchanges, Facebook has been able to wait much longer than the others before it went public. Thus, at the time it goes public, Facebook will have been a much larger company and under far more scrutiny than any of it's innovative ancestors. For it's implied market cap based on the current financials, it's hard for some to justify the valuation. If from here on out, Facebook's only source of revenue and income will be derived from those little advertisements on the side of the page, I would agree with this sentiment. However, I believe there exists a high probability this will not be the case and this article is the first of a series of many, on what value drivers Facebook will look to exploit as it moves past the advertising revenue model and into the next level of the web.
I must admit, I was only a wee lad when the Dot Com bubble had struck Wall Street back in 1999 and 2000. Thus, my approach in this analysis may seem just as hopeful and naïve as the speculators back then. The horror stories are well documented. However, my take on situation is that back then, the Internet was the Wild West, retail investors were the gold speculators, and the banks and brokers were the guys selling the picks and pans. Things got a little out of control. Can you blame them? The giddiness and excitement over these new companies was still spilling over from back when only a few years prior, Americans were just finding out that the Internet even existed. (Hint: It's not a computer billboard) On behalf of many of those dot com companies, the good intentions were there; they wanted to be successful, but their business models were undeveloped and the firms had yet to really figure out how to make money using this new technology. Even today, web and technology companies are still learning how to extract value out of their business models. Coupons have been around for ages, the Internet has been around for decades, and it was only until recent that a company (GRPN) figured out how to put the two together. (The same cannot be said for their income statement, however.) Yet, we have made great strides in the last ten years and the future is bright. There are a slew of macro trends that support the belief that over the next ten years, the amount of money to be made online will be a great deal higher than the last ten. The question is who will monetize these trends and benefit most from the future growth within the industry? Looking at Facebook today, we see a company that in less than one decade, has grown from a social network for college students into a company that is approaching 800 million users and trying to build the foundation for the next level of the web. Can they fail? Of course they can. Do I expect them to? But not before they go for the throats, and by that I mean market share, of nearly all their competitors.
The first on this list, and perhaps the easiest for Facebook to pick off, would be LinkedIn (NYSE:LNKD). It makes sense for Facebook, as it would be a valuable first step towards what I think is one of their major long-term goals, which is to make a major move into the enterprise market. If you are looking at the potential to unlock value, corporations and businesses have much deeper pockets than individual consumers do, even if that consumer base is a very large one. By making a noted effort to go after LinkedIn's market share, Zuckerburg and company will begin the first of many steps towards building long-term relationships with businesses as well as their future employees. In addition to opening the door to the enterprise, the online jobs classified market has a great deal of earnings potential on its own. LinkedIn grossed roughly $500 million last year. Monster World Wide (MWW) pulled in a billion. Mark Mahaney of Citigroup has estimated the online jobs recruitment market to be a $3 billion a year industry. This is peanuts in Facebook terms, but I believe it is a market they could conquer with some level of ease and would be another step towards their long-term goal, which I believe is to establish the next level of interaction and experience within the Internet. Taking LNKD out to the woodshed is not some crazy, lucid thesis. They have been slowly sneaking into the jobs market for some time now. This little blurb of news went under the radar last fall, maybe because the European sovereign debt crisis was full blown at the time and news outlets had better things to talk about, but partnering with the US Department of Labor to "create a central location for employment services for Facebook users" is a pretty major event! I guess being Obama's right hand man has some perks. My favorite part of the Department of Labor article was that LinkedIn "doesn't see it as a competitive threat". I believe that outlook, in addition to being outright pompous, will be one that ultimately leads to LinkedIn's untimely demise. The numbers seem to agree with this sentiment and tell a story far more compelling than my opinion ever could.
The infographic below, posted on late last year by MBAOnline.com, shows some surprising results when looking at who is currently winning the social media "jobs" race:
From this brief overview, it seems that thus far, Facebook is beating LinkedIn at its very own game. The partnership with the DoL came at the end of last year, so these numbers are most likely unaffected by that catalyst. This suggests an even stronger year for FB in this segment as that relationship begins to play itself out. This once again shows Facebook's ability to leverage its economies of scale, and just how many connections there are to be made when your network population is comprised of nearly a billion people. Nearly twice as many people claim they found a job on Facebook versus LinkedIn. Is that number (18.4m) a smaller percentage of their user base in relation to those (10.2m) who claim they found a job on LinkedIn? Yes, but that should be expected! Jobs are supposed to be LNKD's bread and butter!
Up until now this has been nothing more than a side project for Facebook, who will undoubtedly look to explore new potential revenue streams now that they are a public company looking to please an investor base with already sky-high expectations. Its not just the number of successful job pairings that make such a strong case for Facebook here, they are superior in nearly every other metric: When it came to using the site to look for a job, 50% of "job hunters" headed to Facebook as opposed to 26% for LinkedIn and 25% for Twitter. Of that same demographic, 20% had professional information in their profile as opposed to 15% for LinkedIn. They even boasted a higher success rate in those who received a job referral: 16% for Facebook and only 9% for LinkedIn. The study also sheds some light onto the potential that still exists for a social network to steal market from other traditional methods of employment search. In 2011, 16% of employees claimed they found their job through a social network. This is up from 11% in 2010, and there is no reason to believe that Facebook could not steal another large chunk away from 'Newspaper' (30%) and 'Internet Job Board' (30%) once they begin to make a concerted effort to penetrate this market and go directly head to head with LinkedIn. The collaboration with the US Department of Labor is a positive step in the right direction. I am guessing we will see similar partnerships and collective synergies in the near future.
I see Glassdoor.com as a potential target that Facebook might be able to bring aboard (for the right price) and immediately bolster their ammunition. Glassdoor already uses the Facebook Plug-In, which allows users to log in with their Facebook accounts and grants users access to reviews of companies, salary ranges, and various pros and cons of employment at each company, strait from the mouth of the (anonymous) employees. It makes sense on a number of levels and would fit in perfectly with Facebook's love of "big data". Even if they did not make any notable acquisitions within this space, they are already in the position to send LinkedIn to the wayside just as they did with Myspace. (Ohhhh, social media burn!) At this point it's only a matter of how, not when, Facebook will make their move. If Jeff Weiner and the rest of his team at LNKD continue look at Facebook as a "non-threat", I have a hard time seeing his company survive the next wave of "cuts" set to hit the industry. Zuckerburg is setting himself up to join the likes of Jobs, Gates, and Page on the varsity team, while LinkedIn looks like its ready to ride the pine.
As noted earlier, this analysis is the first in a series of articles in which I explore Facebook's potential to move into various industries and build upon their current business model. This includes, but is not limited to: their march into the enterprise space, e-commerce, and their ability to combine search with content discovery.
Thank you for reading.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long NPSNY. Naspers indirectly owns shares of FB through their investment in Digital Sky Technologies / Mail.ru Group.