Why Facebook is a good long-term bet

robin.grant

Forbes recently carried the following article from me, commenting on Facebook’s IPO and whether their valuation is justified

Forbes

Facebook’s share price may follow an erratic pattern over the next few days and weeks, as did LinkedIn, Groupon, and Zynga after their recent IPOs, but it is a good long-term bet.

With a likely valuation of over $100 billion, at a massive multiple of a hundred times 2011 profit, the company might not look so promising based on its current business model and associated revenue and profit growth. But that’s not what you’d be investing in.

It comes down to these three factors:

Global dominance. Facebook almost completely dominates social networking globally. It has 900 million monthly active users and 526 million daily active users, numbers that are still growing rapidly (although admittedly user growth has stalled in mature markets like the U.S. and Britain). Perhaps more importantly, the average time people spend on the site is astronomical, with U.S. users logging on average more than seven hours a month, regardless of whether they access by PC or on their phone, as most now do (and again these are numbers that are growing, not declining). Facebook is dominant in all major world markets other than China, Japan, South Korea, and Russia, and based on current growth it’s only a matter of time before that list shortens to China alone.

Strong leadership. MySpace lost its lead because of Rupert Murdoch’s lack of understanding of social media and resulting mismanagement. Mark Zuckerberg, on the other hand, is what you would call a digital native, and he really gets it. His leadership of Facebook’s product development over the last eight years has proven his abilities, as he has constantly evolved and grown the site’s offering. A few hiccups aside, he has consistently made it more and more attractive to both new and existing users with each release.

Not only that, but with the acquisition of companies like Instagram, Glancee, Gowalla, Beluga, Snaptu, Friend.ly, and FriendFeed, Zuckerberg has shown that he has his eye on the ball, and has successfully brought into the Facebook fold external ideas and technologies that keep it ahead of the game (and has taken potential competitors off the field in the process). With Facebook’s dual-class share structure guaranteeing that he’ll remain in control of the reins of power, with a post IPO war chest of around $8 billion, we can only expect both product development and acquisitions to accelerate.

New revenue streams. Facebook currently brings in around $1 billion of revenue a quarter, with about 85% of that from advertising. However, the growth in that revenue is slowing, and this week GM, the U.S.’s third biggest advertiser, pulled the plug on advertising on Facebook (although the automaker is still investing in engaging with its communities on Facebook). So what? Ford has come out publicly in opposition, saying it will continue to invest, and Facebook is continually evolving its advertising offering, just like any other aspect of its product, so expect this growth to continue (although it may continue to slow through saturation). However, there are plenty of other potential revenue streams:

So there you have it. Facebook owns the majority of Internet users, is likely to keep them in the future, and has only just started to work out how to make money from them. In short, it’s a good long-term bet.