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Friday, 11 May 2012

Can We Be Just Friends? $1,000 says yes!

By: Nzube Ufodike, CEO

Are you ready for the IPO of the decade next Thursday? During the week that Facebook (FB) began its roadshow, Groupon hit new lows of 50% of its IPO price on the NASDAQ stock exchange. In this tale of two cities, is the one-trick pony precedent by Groupon
(coupon sales) about to hit new highs with FB (advertising sales) pricing itself in the upper percentile of listed companies, in the Standard & Poor’s 500 Index, on a price to earnings basis? What FB is worth as well as the moving parts to their business is clearly up for debate.

Fundamentally, a company is worth whatever a buyer would pay for it. However, early stage valuations are a closer function of earnings potential, people and the product. Before I articulate my thoughts below, let me digress with an excerpt from Trey Songz "We Can't Be Friends":
And I wish we never did it
And I wish we never loved it
And I wish I never fell so deep in love with you
And now it ain't no way we can be friends
Earning potential: At 2 billion USD in revenue last year and 50% EBITDA, FB is turning in a tidy profit. Furthermore, with capital expenditure on infrastructure higher than the industry average and ad revenues per impression lower, there is significant upside potential. Thirdly, virtual credits and e-commerce are also less than 5% of revenues but make up more than 90% of Tencent's (FB's China clone) revenue. Based on these, back of the envelope calculations place annual earnings north of 25 billion USD within 5 years. 

Let us not forget to factor in emerging markets where  FB is experiencing some of the highest growth rates. There are more people on the planet with a  FB account than there are with international passports. Companies are gradually beginning to recognise its dominance and are willing pay to access some of those customers. That said, the future seems to be a bright blue thumbs up.

People: Putting aside the Social Network movie's portrayal of FB's founder, Mark Zuckerberg has a commendable track record of aiming just beyond the higher end of whatever range he can hit. In addition, being the single largest shareholder and CEO permits him to drive through his company's vision. It's not all about Mark though; his army of hackers have been key to his building the world's largest online community. He is the single biggest asset to FB and without any obvious succession planning in place, continuity risk is pretty high.

Another key driver is very connected and very powerful Sheryl Sandberg. Since she joined as Chief Operating Officer (COO) in 2008, the company has been forced to grow up. The loss of innocence came at a cost and some of the underhand PR tactics have damaged FB's reputation. Bringing your mum to a college party is certainly not cool but shareholders can take some confidence in the fact that she takes no prisoners, and her adult supervision might be the secret sauce for a business that plans to take over the internet. Did I forget to mention she received an MBA with highest distinction from the Harvard Business School? Yep, she's smart.

Product: Life before FB is akin to life before mobile phones, and if you were around, life before email. They have defied a law of innovation by creating a significant walled garden on the internet. Sir Tim Berners Lee, the father of the world wide web, is not pleased and goes so far to argue that Facebook is a threat to innovation. The Social Graph and prevalent integration of FB APIs into websites make it hard to imagine a world wide web without FB.

But let us not pretend - FB is no longer cool. Anyone that believes otherwise probably also thinks Blackberry, or Nokia even, has a future. FB is simply the de facto way most regular (middle-aged) people amuse themselves and each other, share videos, photos, manage their diaries, communities, real and virtual friends. Their strategic acquisition of Instagram, a mobile photo sharing platform for 1 billion USD in cash and stock options, highlights that they are aware of the importance to connect with the "cool" networks. This is driven home by a recent online post by a 13 year-old on her disappointment 'that site for old people' was acquiring her favourite platform a la Instagram!


The ecommerce holy grail is yet to be penetrated by Facebook. Innovative attempts such as FB online cinemas/theatres, C&A shopping centres in Brazil, virtual currency, and micro-payments have had varying degrees of success. Only social games have really hit the ball out of the park and constitute nearly 12% of FB's entire revenues. Remember Tencent.

There is scope for FB to do more as a platform. For instance, it can become a credible source of identification and replace passports as well as facilitate digital citizenship and e-Government. While 1 in 3 Americans own a passport, 1 in 2 have a FB profile. Mobile commerce, money transfers, and points of interest are areas that FB could easily dominate.  The recently launched "Life Events" reminds us how powerful the network can be if tapped into as an instigator of change. By adding this simple feature, within 24 hours, they increased the organ donor registry in California by 800%


With respect to the Trey Songz segway, most of my friends have complained about FB privacy settings, switching up the interface every few months just as you finally learned how to use the old one, threaten to delete their profiles or boycott FB, etc. yet many still reamin on FB because there is no other real alternative. Investors see this and plan to pay a premium of around a thousand dollars per FB profile. This is truly the Facebook generation. 

1 comment:

  1. I totally agree with Tim Berners Lee's views. Facebook is certainly good at stealing our content and making ad revenue off it. We put it there though.

    Can't see people in Europe using Facebook as often, but as you pointed out - people in emerging markets are signing up to Facebook at an alarming rate.

    Still not enough to convince me to invest in it though.

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