Is Facebook Really Worth $100 Billion?

The new target price, plus the extra shares to be floated, means that Facebook will initially valued at more than $100 billion. Does this seem reasonable? Now, not likely. In the future, maybe.

The Numbers Don’t ┬áLine Up

The issue with the $100 billion valuation is that it is far out of line with their current and anticipated short-term future revenue. They made $3.7 billion in revenue in 2011, 85% of that from advertising. Compare them to another $100 billion company, Amazon. The on-line retailer sees revenue of about $47 billion, or more than 10-times Facebook revenue. So how is it that Facebook, with 1/10th the revenue, would be valued the same?

Now, you could argue that the $100 billion is a bet on the future. Sure, but the same goes for Amazon. Amazon has seen fairly consistent growth over the years, and while it will continue to slow over time, it may still stay ahead of Facebook in revenue for several years. From a hard-numbers and past-history analysis, the $100 billion valuation for Facebook seems out of line by an order of magnitude.

Does that mean Facebook should never be worth $100 billion? Now that’s a different question. Obviously, any answer needs to start with “it depends”. If Facebook continues to focus on advertising and game purchases for revenue, then I have my doubts about how big they can become. Sure, at 900 million accounts, there is still room for growth. But how much more is up for debate. There are substantial parts of this world without reliable Internet access (or any access at all). Even in areas where access to the Internet is available, not everyone can afford it. Beyond that, not everyone sees value in Facebook, and even those that do, are reluctant to share much information. That information is a key part of Facebook today, and in some ways a potential weakness in their business. So far, Facebook hasn’t truly abused or lost control of the data, but when that does comes (and it will, it is just a matter of time), it will be devastating to the company.

Less Explicit, More Implied Data

Facebook needs to do a couple of things, in my opinion, for long-term success. First, stop trying to get more data and more personal information on people. If anything, ask for less. Having more active users is more important than having lots of data on a smaller base of users. Some of the newer features (like grouping people by location, past employment, etc) are a better way to let people organize their networks, and you can tell more from that and their activity than you can from asking for other personal details. I don’t need to know someone’s date of birth or the spousal relationship to know they have an interest in collecting antiques: if they interact with Facebook pages dedicated to antiques, that’s a pretty good sign, and more than enough to make the connection. Having a detailed resume is interesting, but if they have connected with a number of people and then organized them by company names, it’s a pretty good guess they were either co-workers, or had some sort of business relationship.

Using implied data, rather than explicit data, is in some ways more valuable. Why? The implied data is actually based on explicit action (I took the time to put some of my connections into a category called “XYZ Corporation”). Simply saying “I worked at XYZ Corporation” doesn’t mean you want anything to do with the company or past co-workers. I may have it on my resume for completeness, but I may not have liked the company or the people I worked with. Taking the time to connect and organize means a lot more.

Become A Destination, Not A Hangout

You could argue that Facebook is already a destination. It represents nearly 1/5th of all page views in any given year, and is the most visited site on the Internet. It has nearly 1/7th of the world’s population signed up. Clearly, this is a popular site.

But what people could be doing is more than keeping up with family and friends, as well as playing games. In my own list of friends, I see more and more of them sharing news and information. There is value in knowing what people that I know are reading or are interested in. It tells me that I may also be interested (or not, if I have a divergent viewpoint). The article or item may have been something I saw, but passed over, but if some of my friends or colleagues took the time to read it, maybe I should go back and check it out. It also means that I may now find out about things that I wouldn’t necessarily find on my own. More eyes scanning the horizon stand a better chance of seeing more.

By becoming an information portal, I’m no longer just “hanging out” on Facebook from time to time, I’m going there (and staying there) for a purpose. We already get “news and information” about our friends and their activities. Expanding this to be a way to discover what else is happening in our communities, our countries or the world around us makes Facebook a more compelling place to be. Being able to take a broader view, plus go deep in specific topics, has value. It becomes like Reddit, in that I can get a sense of what news or information people think has value, but instead of just strangers, I also get feedback from people I know. An opinion from someone I know, or are at least familiar with, has far more value than the opinion of a complete stranger.

The “Media” Part of “Social Media”

What this ultimately means is an increased emphasis on the “media” part of “social media”. Facebook has done a lot on the social aspect, helping people connect and stay connected. What needs to happen now is to make the media portion more meaningful, with broader and deeper content, fed in part by people’s various connections and the network of connections that exist within Facebook. This isn’t about gathering more personal details from people. It is about watching what they do, and acting on that accordingly. The result is a deeper and more compelling reason to use Facebook. It means the potential for better, focused advertising (increasing the potential value of those ads). It means helping people find information, and having some faith in that information because their friends found it of value as well. It means getting feedback on that information, again from friends, to determine the true value of it.

If Facebook transforms their service, and the business behind it, then they could be worth $100 billion in the not-so-distant future. For now, though, I think the number is unrealistic. Facebook is valuable. It just isn’t $100 billion value, at least not yet.