Facebook is valued at “plenty”
By Wall Street’s tech cognoscenti,
Take 1 billion friends
Times 5 dollars, then
Times IPO multiple: 20!
— Limericks Économiques
Last week, I made a surprising discovery about Facebook: It has far fewer “active” users than it claims. I learned this from a note buried deep in the company’s S1 — the IPO document it filed with the SEC in order to go public. Based on its S1, the social-networking giant’s value is probably much less than most investors seem to think.
One advantage of working in finance is that you get to meet lots of very nice, really smart people such as David Wilson, who writes the Chart of the Day column for Bloomberg. His column is my Sudoku, as I challenge myself to poke holes in the correlations it identifies between various assets. It’s good wonky fun.
On Feb. 3, the column used Facebook’s SEC data to show how fast the firm was growing. FB was becoming a “daily habit for more users,” and the numbers from the IPO filing were extraordinary: 845 million Monthly Active Users and 483 million Daily Active Users.
MAU? DAU? I had never heard of either metric, and novel accounting for public companies is always a red flag. Don’t just take my word for it, ask a Groupon investor.
I thought these metrics were suspect. If you do not have to go to Facebook.com to be counted as an active user, are the metrics misleading? I asked Wilson, who pointed to details in the S1:
“Daily Active Users (DAUs). We define a daily active user as a registered Facebook user who logged in and visited Facebook through our Web site or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party Web site that is integrated with Facebook, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement.”
Let me translate: If you clicked a “Like” button anywhere on the Internet, then you are a Daily Active User. Even if you never go to Facebook.com.
As huge as those MAU/DAU numbers were, I wondered how this detail might affect revenue. The Facebook metrics for annual revenue per user were stunningly modest: Facebook picks up $5 per user each year. Compare that to Google, which garners more than $30 per user per year. Netflix takes in closer to $144. Is this why Facebook’s annual revenues are so low compared to its 850 million user base?
Why does this user-behavior metric matter? Consider what it means in terms of how “daily users” will generate revenue and profits. If all users do is click a “Like” button, but never make it to Facebook.com, they cannot be “monetized.” They cannot be marketed to. They do not see any advertising. They cannot be sold any goods or services. They take advantage of FB’s extensive infrastructure to tell their FB friends (who may or may not see what they did) that they liked something online. That’s all that happens.
So they not only fail to generate revenue for Facebook that day, but they are actually a cost. It’s not cheap to maintain that massive infrastructure of Like buttons everywhere. Someone’s got to pay for the server farms that handle the back-end of this.
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