

Facebook’s 1st-Quarter Profit Falls 12% - tomkarlo
http://dealbook.nytimes.com/2012/04/23/facebooks-1st-quarter-profit-falls-12/?nl=business&emc=edit_dlbkpm_20120423

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zred
Assuming earnings of $205M per quarter and a valuation of $100B, that would
put Facebook's P/E ratio at 122. Today, Apple is at 16.3, Google at 18.1,
Netflix at 24.4, and Microsoft at 11.7. Now, it's completely possible that
Facebook's _earnings_ growth will outstrip those more established companies.
However, it does show that one has to think Facebook will grow its earnings at
a considerably faster rate than those companies to be a good value at a $100B
valuation.

Myself, I don't see Facebook necessarily going the way of AOL and MySpace.
Facebook's engineering chops are a lot better. Sure, there's an amount of
social lock-in that they shared with AOL and MySpace, but that isn't the only
thing keeping Facebook on top right now. Facebook has made sure that their
site runs well - a minimum of errors, predictable and decently speedy
response, and a willingness to address technological challenges that keep the
site humming. While we might lambaste Facebook a bit from a social
perspective, they've open sourced some genuinely good tools and seem to be
sticking to their technological guns. Unlike MySpace, AOL, and Yahoo, Facebook
isn't morphing into a company where "media" types run the show. While the
social aspect is very important for Facebook, I think there's a more
engineering-centric or engineering-friendly culture that will persist there
like it has at Google. I don't see the higher-ups at Facebook thinking "oh, I
get the cool stuff the kids today are hip to and I just need some peon
programmer to translate my awesomeness into computer speak. All programmers
are interchangeable cogs, right?" I think that does speak to Facebook's
longevity. In technology, you need to be able to improve your product, not
just keep the lights on.

However, Facebook relies on non-technological factors more than Google or
Apple. Facebook needs to remain the place people sign up when they join a
social network. It isn't too hard to imagine Facebook becoming the place known
as the hangout for people's parents. As someone in my twenties, I'll probably
have teenagers in 15-25 years (a decent number of my friends will in 15
years). Will they want to be on the social network that I'm on - the social
network of my generation? It's already weird to me when old people sign up for
Facebook. I don't want to "friend" my actual friends' parents. Frankly, I'm a
(slightly) different person when I'm talking to my friends and when I'm
talking to my friends' parents. Likewise, Facebook is treading a thin line on
sharing. In the early days, Facebook was very closed and putting something on
Facebook felt more private. Facebook has been slowly changing that to the
point that I wonder whether I should just edit myself a bit more and publish
publicly rather than on FB in a more formal way (ie. a blog). Finally, people
could just get tired of it. I'm finding less interesting things in my newsfeed
as time goes on. I find that I don't feel like posting as much.

For me, Facebook's valuation at $100B seems high given its earnings. It's PE
ratio is above 100 and so one has to assume much more growth than other very
good companies. It might happen. However, I think Facebook faces a decent
amount of uncertainty in its future. It's well-engineered and well-run
compared to those who have failed that we might point to as Facebook's future,
but with a social product there's more than just having good service and any
number of things could hurt Facebook from privacy concerns to becoming the
network of the people who went to college from 2000-2015 while younger folk
find a different place to digitally hang out. I wouldn't compare them to AOL,
Yahoo, or MySpace, but I'd still say Facebook's valuation is quite high.

~~~
redthrowaway
Facebook's valuation is based on _potential_ , as opposed to any real metrics.
It has a staggering number of active users and frightening amounts of data
about them. The bet is that they find a way to capitalize on it.

I'm not bullish on facebook by any stretch of the imagination, and their P/E
is ridiculous, but it's also the wrong metric to be looking at when deciding
whether it's a good investment.

~~~
repsilat
> It has a staggering number of active users and frightening amounts of data
> about them

The financial value of those users must grow super-linearly. The most recent
figures I can find put them at having 901 million active users, which means
they're valued at $111 per active user. Crazy stuff.

~~~
jbooth
If they can sell a $3 CPM, and each user loads 40,000 impressions lifetime,
then they've monetized each user at $120 over that time period. That's a lot
of impressions per user, but people click a lot on facebook. Plenty of room
for them to grow.

~~~
jonknee
That's a ridiculously high CPM for social media. The page views are very low
value, even with all the targeting. Considering their revenue now and their
traffic figures (over 1 trillion page views a month), their average is
currently very low. $1B / 3T page views = $.33 RPM. They get a decent chunk of
revenue through things other than advertising (namely their payments system)
and that's a low-ball on the traffic, their traffic is very low value. Further
growth is likely to come from international markets that are also very tough
to monetize. To get that RPM up 10-20x would be astonishing.

~~~
redthrowaway
I still don't see their endgame being traditional display advertising. It just
can't provide the kind of cash they need. I think we'll see the engineers at
facebook find ways to directly exploit the value of their network, but I only
have vague notions of how they might do that.

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PaperclipTaken
I am predicting that eventually Facebook is going to go the way of MySpace and
AOL, but I don't think that this quarter is indicative of the trend. Both the
number of daily and monthly active users jumped by more than 100 million, and
Facebook also increased their marketing and S&D expenditures by more than 100
million.

If someone were to suggest that Facebook will eventually fall, the raw data
from this quarter will not provide a sufficient argument. My argument would
come from the idea that Facebook is currently acting like a very greedy
company, with aggressive publishing of advertisements and aggressive policies
that may eventually scare away the user base.

Especially with the internet becoming increasingly aware of the lack of
privacy vs. the usefulness of privacy, it would be easy for Facebook to end up
on the list of "bad guys" if they don't tread carefully. My prediction is that
they will eventually overstep their bounds in greed, but it's too early to be
comfortable with that prediction.

~~~
Trezoid
I completely agree. Facebook is providing a platform in a market that has
always been extremely volatile, and are using their position to make
questionable decisions. It will back-fire eventually.

Personally, I can't honestly see facebook being nearly as central in 5 years
time, if it exists at all. Some hot new thing _will_ come along and do sharing
better and everyone will jump all at once.

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mikeryan
Its profit, its going to be volatile. Honestly some folks will want to say the
sky is falling but a lot of folks will point out that any profit at all for a
company growing like Facebook is a waste of perfectly good cash.

~~~
moreorless
Please explain why it is bad for a growing company to turn a profit?

~~~
kragniz
I assume one could say the spare money could be spent on growing the company,
making more money in the longer run.

(disclaimer: I have no idea what I'm talking about)

~~~
eldavido
Right.

Good corporate governance points toward the maximization of long-term
shareholder value, as measured by the present value of payments to
shareholders (dividends, buybacks, etc.)
<http://en.wikipedia.org/wiki/Net_present_value>

Silicon Valley has a somewhat bizarre culture of viewing dividend payments as
"defeat", as in, "We can't find anything better to do with the cash because we
aren't innovative, so we're giving it back to our investors". This is where
the (strange) logic of profit=evil comes from in these conversations.

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rabidsnail
That's compared to the previous quarter, not the same time last year. Web
usage is cyclical.

~~~
pessimist
No - net income in the 3 months ending Mar 2012 declined to $205m from $233m
in the 3 months ending Mar 2011. A big surprise, probably some big investment
in datacenters or something. Net income can be rather bumpy, revenue growth
was more solid at 45% year-over-year, but even that can't justify the massive
valuation. The valuation is really a bet that FB future monetization will be
amazing.

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redguava
As much as I like to see people talking about profit rather than revenue,
revenue is really important as long as you are profitable. It is only when you
are losing large amounts of money every month that revenue is less impressive.

Facebook had over 1 billion dollars revenue in the quarter and they were
profitable. Why is it so bad that they decided to spend most of that revenue
to grow the business further rather than keep it as profit.

If revenue is decreasing, thats another story, but profit being down for one
quarter is a result of how much they are reinvesting their money.

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Irishsteve
They still had 1 bill in revenue not so shabby. Without Facebook half the
internet would appear not to function correctly be it SSO or analytics. Guess
they are here forever and ever and ever

~~~
objclxt
Don't fall into that trap: it's dangerous. Twelve years ago AOL was doing just
as well ($1-2 billion each quarter, $300-400 million in earnings), and was the
largest portal/ISP around. Blackberry and Nokia were kings of the mobile
mountain five years ago.

You are only as good as your current product: Facebook's commodity is people,
and people are not as loyal as you might think.

Facebook could very well be around a long time, but 'forever and ever and
ever'? Smart people have lost a lot of money thinking like that. I certainly
wouldn't gamble on it.

~~~
gauravk92
Facebook also owns your social graph and that is what they exclaim proudly
about the most as well. If any other service wants access to it they have to
ask Facebook and they can't just take it. And if there is no Facebook
integration, then theres an additional level of friction in getting new users.
It's definitely a tough market to breakthrough in because of Facebook (Ask
google).

~~~
dj_axl
> Facebook also owns your social graph

Any email provider also has your social graph. The only problem with email is
that it is seen as "old" compared to the "new" of Facebook and Twitter.
Something else will come along and be the new "new" and that will be the end
of Facebook.

~~~
Bakkot
> Any email provider also has your social graph.

They really don't. Not the way Facebook does; not for the post-Millennials.
People email bosses and professors and acquaintances; they use Facebook for
friends.

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nzealand
Halloween should be a good time to think about buying into Facebook.

