Facebook Is Just an Overpriced Combination of Google and Zynga
Facebook isn't priced for perfection. It's priced as if its business will be something else entirely in five years.
That's the only takeaway one can have after looking through Facebook's latest IPO registration statement, which showed continued decelerating growth in the company's two revenue drivers, advertising and payments.
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The law of large numbers appears to have caught up to Facebook early, as sequential and year-over-year growth have dropped significantly in the past two quarters.
When Facebook was growing revenues over 100% per year, it was okay to give the company the benefit of the doubt and throw a fat multiple on what it was taking in. Now that such hypergrowth has stopped, at least for the time being, it seems fair to compare its revenues to its peers.
Facebook can be thought of as a combination of two companies, Google (GOOG) for its advertising business and Zynga (ZNGA) for its payments business. Facebook bulls may disagree, but in terms of monetization, that's all it has for now.
Over the past 12 months, Google had revenues (excluding traffic acquisition costs) of $30.7 billion, up 24% year-over-year. With a market cap of $194.3 billion, and net cash of $43.9 billion, that's an enterprise value (or EV) of $150.4 billion, or an EV/sales ratio of 4.9. Facebook's advertising revenues over the past year were $3.4 billion, barely 10% of Google's, and Q1 advertising revenues grew 36% year-over-year. How much of a valuation premium over Google's does Facebook's advertising business command? I think an EV/sales ratio of 10 is more than generous, so let's say that part of the business is worth $34 billion.
Facebook's payments/fees business was always what had the bulls excited, but even that crashed back to Earth in Q1, falling 1.1% sequentially; it had never before grown less than 20%. Much of this business is tied to Zynga, which the company admitted accounted for roughly 23% of its first-quarter revenue.
Zynga reports its Q1 results today, but for the sake of this analysis let's assume Wall Street expectations for revenues are correct. If that's the case, trailing 12-month revenues have been $1.187 billion, with Q1 revenues up 31% year-over-year. Zynga's market cap as of Monday's close was $6.29 billion, but even after the OMGPOP acquisition the company still has roughly $1.6 billion in cash (apologies if there are other big-ticket acquisitions I'm missing), so the company has an enterprise value of $4.7 billion, and an EV/sales ratio of 4.0. Facebook's payments/fees business, which took in $649 million over the past 12 months, still appears to be growing much faster than Zynga's, and obviously the company hopes its Facebook "credits currency" becomes the de facto standard for digital goods. An EV/sales ratio of 4.0 for this business is way too low – let's give it instead a lofty multiple of 25, or a valuation of roughly $16 billion.
So that gets us to $50 billion, with the balance essentially Zuckerberg fairy dust.
How will the company monetize mobile? Will it figure out how to collect a toll for enabling the rapid growth of peer companies like Instagram and Pinterest? Can it figure out new and innovative ways of monetizing its massive 900 million user base? Can it create a Google-killing social search? If you're paying more than $50 billion for Facebook, that's what you're paying for.
Facebook isn't priced for perfection. It's priced as if its business will be something else entirely in five years. Maybe it will be, but I'm not counting on it.
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