The Facebook Bet
February 10, 2012
Getting a piece of the action in Facebook's first offering of stock to the public is all the rage.
For instance, Morningstar research finds that 50 mutual funds have stakes in either the A class or B class of Facebook.
Among the largest holders are T. Rowe Price, Fidelity Investments and Morgan Stanley. Morgan Stanley also is the lead underwriter in the offering, which is expected to raise at least $5 billion and possibly as much as $10 billion.
Among the funds with shares are T. Rowe Price Growth (PRGFX) and Fidelity Contrafund (FCNTX).
Facebook could be valued at as much as $100 billion, when the sale of stock is completed.
That is incredible, right?
After all, Google dominates the advertising business today. Period. Full stop.
The Internet Advertising Bureau reports, for instance, that Internet ad revenues in the first half of 2011 hit a record $14.9 billion.
That's got to be undercounted. Because, for all of 2011, Google alone pulled in $36.5 billion of ad revenue.
By comparison, the entire newspaper industry was on track to pull in about $20.7 billion in print ad revenue last year, according to eMarketer. The magazine industry was looking at $13.9 billion.
Google, by itself, was bigger than the newspaper, magazine and Facebook industries combined, you could almost say.
Plus, Google drops about 25 cents of every dollar of revenue to its bottom line. Its net income last year? $9.7 billion.
It's got the power to change the media landscape, just as Apple did the devices that consume and create media.
In 2004, Google pulled in $1.7 billion from its first sale of stock, giving it a value at the time of $23 billion. Pretty stout.
But here's why Facebook is looking stouter to a lot of fund managers, investors and technologists.
Google, in the year before it went public, had $106 million in net income on just under $1 billion in revenue. In 2011 dollars, that would be $130 million of profit on $1.2 billion of revenue.
By comparison, Facebook is going public on a huge wave of growth. It has pretty much doubled in size each of the last two years. In the year preceding its IPO, it pulled in $3.7 billion in revenue. And $1 billion in profit.
Its bottom line as it goes public is nearly the same as Google's top line when it went public.
Plus, Facebook is showing power beyond the ad dollar. Yes, 85% of its revenue still comes from ads. But 15% comes from use of Facebook payments, which last July became mandatory for all game developers accepting payments on Facebook, and other fees.
Eight years after it's gone public, Google still is searching for that next big revenue stream. "Other revenue" is only 3.6% of its total.
Who would you want to bet on, for the next eight years?