Wow, Facebook (FB) shares have fallen hard of late. While the S&P 500 and its tracking exchange traded fund SPY rose nearly 1% and market leaders, such as Apple (AAPL), were up, Facebook's stock performance was horrible.
Facebook, priced at $38 dollars ahead of its IPO and opening at $42 a share on May 18, quickly plunged to nearly $33 dollars a share last week, prior to trading around $28 dollars yesterday.
Still, given Facebook has lost nearly 20% since going public, it's worth looking at the valuation.
While many in the financial community have been quick to group the various social networking companies together, many of the leading social networking companies, such as LinkedIn (LNKD) and Facebook, have very different business models.
LinkedIn gets around 55% of its revenues from job postings, nearly 20% from paid subscriptions, and around 26% from advertising. The company also gets around $1.83 from each subscriber, while Facebook gets around $1.18 from each member, and nearly 82% of the company's revenue comes from advertising. While average users only access their LinkedIn accounts for a reported 18 minutes a month, the company's business model is built around matching employees with employers, not advertising.
Clearly, LinkedIn and Facebook are completely different companies. Still, it is interesting to see how bad Facebook has been at monetizing its business up to this point. To me, the major reason for this is because the value of Facebook's membership is significantly overvalued.
Facebook claims to have over 900 million active users today, and the company gets around 82% of its revenue from advertising. While the company has no presence in China, it is still heavily used outside of the United States. There are a couple problems with this number, though. Facebook only require users to click a box saying that they are over 13, and many Facebook users are not actually over 18 yet. Also, Facebook has zero protection if people create duplicate accounts, and the company has already admitted there are around 50 million fake or duplicate accounts. Additionally, Facebook says only about 480 million users are active daily, and many of them access Facebook just from their mobile devices.
Obviously, 480 million is a huge number. Still, when you consider the highly desired 18-55-year-old demographic that is the most sought after for advertising, and that Internet advertising is paid for on a per-click basis, it's not clear how many people are really accessing Facebook on a daily basis from a computer for more than a couple minutes. Facebook also will likely have a lot of trouble targeting ads, since many of the company's users value their privacy.
To conclude, while many leading companies in S&P 500, such as General Electric (GE), and many leading technology companies, such as Apple, may not have the same growth prospects as Facebook -- and with companies such as General Motors (GM) having recently stopped advertising on the website altogether -- Facebook's real subscriber numbers and the company's ability to monetize its membership should be questioned.
While many companies spend millions of dollars to maintain a Facebook page, most major companies have a fairly limited advertising presence on Facebook today. General Motors, specifically, said it pulled its advertising because Facebook wouldn't allow it to run larger ads, and the company's existing ads got few clicks. While Facebook will likely be the largest social networking site for some time, it's not clear what the company's advertising potential is.
With 82% of its revenue coming from advertising, its membership numbers possibly overstated by a significant amount, and targeted advertising on the website being difficult, the valuation of Facebook is likely to be difficult to ascertain for some time.