ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

(12-12-2018, 05:34 PM)weijian Wrote: [ -> ]Google, one of Silicon Valley's best with its deep pockets and talented engineers, is unable to bring down Facebook on its own turf?

We do have alot of other examples like Kodak trying to move into printers/instant photography (challenging Xerox, Polaroid), Xerox trying to move into office automation (challenging AT&T, Microsoft etc) and IBM moving into software (challenging Microsoft)..all of them failed to use their size to erode the moats of the incumbent - I think it is pretty granted FB's moat is quite insurmountable for new challengers. It will probably take a new disruption.

New bug prompts earlier end to Google+ social network

Google+ failed to gain meaningful traction after being launched in 2011 as a challenge to Facebook.

A Google spokesperson cited "significant challenges in creating and maintaining a successful Google+ that meets consumers' expectations" along with "very low usage" as reasons for pulling the plug.

The social network allows users to download and share data such as pictures and videos.

Meanwhile, Google planned to add new workplace-oriented features to enhance the appeal of Google+ as a "secure corporate social network" to be used inside business operations.

"Our review showed that Google+ is better suited as an enterprise product where co-workers can engage in internal discussions," the California-based internet firm said.

https://www.businesstimes.com.sg/technol...al-network

Imo, Facebook closest competitor is not Google, but Microsoft LinkedIn. The latter brings credibility and it is much harder to disseminate false/negative news without being held accountable.

I do agree that Facebook mid term prospects seems generally positive in any case.

Sent from my ONEPLUS A5000 using Tapatalk

My most used platform is still youtube. Facebook and instagram are already starting to get old. Just that a lot of older people have not transition to video streaming/content yet and costs for the data bandwidth for videos is much more in many countries.

@thor666,
Microsoft LinkedIn is probably something similar but not same. Both LinkedIn and FB are social media type companies that connect people with a network effect moats (the network gets stronger with more people). Their mode of money making is similar (selling ads for FB and the last i know of LinkedIn, it was employers that paid for access for LinkedIn) but target audience so far is different - FB --> generally non work related. LinkedIN --> work related professionals.

As a working professional, one probably prefers Microsoft LinkedIn than FB. But the larger network will always be FB.

@BlueKelah,
While Youtube fights advertising dollars with FB, but probably its business model has more direct conflict with companies like Netflix/DisneyTV etc. It is generally a 1 way street on Youtube (i watch only) but FB is interactive (anyone care to share their FB live experience with S-hook zeh zeh?)

Disclosure: My most used platform is also youtube and i don't have a FB app on my hp for almost 2 years now...But i think i am more of an anomaly than the norm. Similarly, i suspect your preference is also the anomaly, rather than the norm.

Talking about bandwidth, there are alot of countries (esp developing ones) where bandwidth for normal FB is a luxury and hence there is this thing called FB Lite to cater to them. There is a long runaway, as described by John Huber.

Some time back, there was also a discussion of whether Snapchat would be taking away users from FB with its younger following. At this point of time, with FB copying most of Snapchat features via Instagram, i reckon it is a done deal that Snapchat will not be taking over FB as the social media of choice, but would instead have a high probability of fading into oblivion.

(13-12-2018, 11:33 AM)weijian Wrote: [ -> ]@thor666,
Microsoft LinkedIn is probably something similar but not same. Both LinkedIn and FB are social media type companies that connect people with a network effect moats (the network gets stronger with more people). Their mode of money making is similar (selling ads for FB and the last i know of LinkedIn, it was employers that paid for access for LinkedIn) but target audience so far is different - FB --> generally non work related. LinkedIN --> work related professionals.

As a working professional, one probably prefers Microsoft LinkedIn than FB. But the larger network will always be FB.

@BlueKelah,
While Youtube fights advertising dollars with FB, but probably its business model has more direct conflict with companies like Netflix/DisneyTV etc. It is generally a 1 way street on Youtube (i watch only) but FB is interactive (anyone care to share their FB live experience with S-hook zeh zeh?)

Disclosure: My most used platform is also youtube and i don't have a FB app on my hp for almost 2 years now...But i think i am more of an anomaly than the norm. Similarly, i suspect your preference is also the anomaly, rather than the norm.

Talking about bandwidth, there are alot of countries (esp developing ones) where bandwidth for normal FB is a luxury and hence there is this thing called FB Lite to cater to them. There is a long runaway, as described by John Huber.

Some time back, there was also a discussion of whether Snapchat would be taking away users from FB with its younger following. At this point of time, with FB copying most of Snapchat features via Instagram, i reckon it is a done deal that Snapchat will not be taking over FB as the social media of choice, but would instead have a high probability of fading into oblivion.

59% of LinkedIn's ad revenue is from employers. It gives them access to an advanced search system, InMail messaging that lets them message everyone even if not in their network, and a dashboard to manage all their potential hires. About 17% comes from premium subscriptions, which can be used by either employers or employees, giving them a mixed bag of features. On the employees side the interesting features is the InMail messaging, expanding their ability to search and matching them with potential employers. 

Between the business models of Facebook and Youtube, I think Facebook has the better model. But Youtube has a higher cost, but gets 1/3rd the money Facebook gets per click.  Right of the bat, Youtube gives 68% of its revenue to its content makers. Facebook has no such fees. Both Facebook and Youtube are paid per click (although advertisers pay Youtube if a person watches an ad for 30 seconds or more too). Youtube also has to support more Internet infrastructure - both bandwidth, storage and availability - because of its data heavy content. 


It's difficult to say how this translates into profits because Youtube doesn't publish financials. It's possible Youtube may have margins as high as Facebook because it has a higher click per view, which compensates for its higher costs. It all boils down to how many clicks you get, which is a views x clicks per view. Right now, Facebook has more views than Youtube (but Youtube is climbing at a faster rate). But if a day reaches when they have the same number of views, Youtube will have to have 3x the clicks per view + some more to pay for its infrastructure to be as profitable as Facebook. So I think quantitatively Facebook has a big advantage. Qualitatively, I can't tell because I never click on ads on either website. There are a dozen big qualitative factors which putting a number to is impossible, such as is a video streaming site going to get more views, or are video ads more clicked, or is data bursting from streaming videos going to affect Youtube's mobile market. 

But I think the most interesting question, one that I can't find about people writing on these companies, is how big the market for advertising actually is. We're seeing these companies market caps together swell to a trillion dollars, and their revenue comes mostly from ads. But I don't even see a fleeting mention on what I read about how much they can actually grow. Google gives me answers for "global advertising market" as around the five hundred billion range. Facebook has a net margin of 37%, so the theoretical max profit of these companies combined is say 200 billion. If we apply a 15 times P/E to this, we get a max market cap of 3 billion, about a three bagger, assuming these mega IT companies seize almost all the market share. Of course, advertising is a growing industry, which will add some percentage points to this. Would love to hear thoughts about this.

According to FB executives, they dont' sell data, rather they are facilitators of advertisers and consumers. But according to a data scientist, the people who pay money to FB, are able to profile a person via some indirect methods and that is probably what has been done. That said, these actors are probably a very small portion of the actual sphere of advertisers although it only takes a small drop of dirty water to contaminate a pool of clean water.

Facebook Sells Data to Advertisers

In recent weeks, Facebook confronted yet another privacy scandal, in light of leaked court documents suggesting that its staff discussed the idea of selling user data as long ago as 2012. Facebook's director of developer platforms and programs, Konstantinos Papamiltiadis, responded, “To be clear, Facebook has never sold anyone’s data.” It was the same denial that Mark Zuckerberg issued before the Senate in April 2018: “We do not sell data to advertisers. We don’t sell data to anyone.”

As a data scientist, I am shocked that anyone continues to believe this claim. Each time you click on a Facebook ad, Facebook sells data on you to that advertiser. This is such a basic property of online targeted advertising that it would be impossible to avoid, even if Facebook somehow wanted to.

https://outline.com/39qFxq

(14-12-2018, 12:37 AM)Kaimin Wrote: [ -> ]But I think the most interesting question, one that I can't find about people writing on these companies, is how big the market for advertising actually is. We're seeing these companies market caps together swell to a trillion dollars, and their revenue comes mostly from ads. But I don't even see a fleeting mention on what I read about how much they can actually grow. Google gives me answers for "global advertising market" as around the five hundred billion range. Facebook has a net margin of 37%, so the theoretical max profit of these companies combined is say 200 billion. If we apply a 15 times P/E to this, we get a max market cap of 3 billion, about a three bagger, assuming these mega IT companies seize almost all the market share. Of course, advertising is a growing industry, which will add some percentage points to this. Would love to hear thoughts about this.

Kaimin, 

Great back of the envelope calculation on Facebook's valuation based on TAM. Similarly, I seldom see people addressing Facebook/Google's potential growth. Most people just extrapolate the recent growth into the far future.

I would approach the valuation on a slightly different approach based on different scenarios. 
Aggressive scenario for instance: Assume that Facebook has 15% global market share (remaining market share split between Google and other advertising channels etc) of $663 billion in 2021 (from $545 million in 2016 according to Statista), a net profit margin of 50% due to very high operating leverage, Facebook would have a net profit of $50 million. Applying a 15x P/E, I would aggressively valuated Facebook at $746 million.
One could vary the parameters to get a range of valuations for difference scenarios.

Facebook's revenue comes from the Advertising industry, and its customers are mainly businesses. Businesses globally grow at an average rate of 3-4%, per global gdp growth. Thus, for Facebook to grow faster than that, it has to take market share from existing incumbents. And eventually, if it dominates the market, it can't grow faster than that.
One can double-check this by following the sales growth of the world's largest advertising companies (assuming they get the bulk of global advertising work). Companies with a decent size typically outsource their advertising. Google shows that the top 5 advertising companies are WPP, Omnicom, Publicis, Interpublic, Dentsu. The shortfall of this, would be that small companies will be left out of the picture.

Although Facebook own other assets such as Instagram and Whatsapp, the potential revenue will be come advertising as well.

It is hard to have a separate successful business outside of one's mainstay. Facebook, Apple and Google hasn't proven themselves. Thus far, only Amazon out of the big tech names has been successful in doing so.

@Holymage

I think you meant to say billion instead of million?

Quote:..Facebook would have a net profit of $50 million. Applying a 15x P/E, I would aggressively valuated Facebook at $746 million.

I think Whatsapp's monetization strategy will probably be CRM and payments related, given that it currently already allow businesses to communicate with customers en masse, and there are many Whatsapp payments apps in the works. Given it's end-to-end encryption, advertising on whatsapp is also quite inefficient.

(18-12-2018, 08:48 AM)holymage Wrote: [ -> ]Kaimin, 

Great back of the envelope calculation on Facebook's valuation based on TAM. Similarly, I seldom see people addressing Facebook/Google's potential growth. Most people just extrapolate the recent growth into the far future.

I would approach the valuation on a slightly different approach based on different scenarios. 
Aggressive scenario for instance: Assume that Facebook has 15% global market share (remaining market share split between Google and other advertising channels etc) of $663 billion in 2021 (from $545 million in 2016 according to Statista), a net profit margin of 50% due to very high operating leverage, Facebook would have a net profit of $50 million. Applying a 15x P/E, I would aggressively valuated Facebook at $746 million.
One could vary the parameters to get a range of valuations for difference scenarios.

Facebook's revenue comes from the Advertising industry, and its customers are mainly businesses. Businesses globally grow at an average rate of 3-4%, per global gdp growth. Thus, for Facebook to grow faster than that, it has to take market share from existing incumbents. And eventually, if it dominates the market, it can't grow faster than that.
One can double-check this by following the sales growth of the world's largest advertising companies (assuming they get the bulk of global advertising work). Companies with a decent size typically outsource their advertising. Google shows that the top 5 advertising companies are WPP, Omnicom, Publicis, Interpublic, Dentsu. The shortfall of this, would be that small companies will be left out of the picture.

Although Facebook own other assets such as Instagram and Whatsapp, the potential revenue will be come advertising as well.

It is hard to have a separate successful business outside of one's mainstay. Facebook, Apple and Google hasn't proven themselves. Thus far, only Amazon out of the big tech names has been successful in doing so.

Very nice analysis. Your thoughts on the advertising market seems correct. Statista gives the annual growth rate of the global ad market as ~4%. From 2011-2017 Omnicom's revenues grew by 20%, and Interpublic at 12%. So the growth is in the low single digits. If this, combined with the 30+% earnings growth of FB every year, in 3 to 5 years FB earnings growth will be in line with global ad revenues, and the competitors will resort to an aggressive war to either cut costs or invest in themselves to provide more valuable services. But from your calculations, it seems there is still value in FB.

Not a fundamental analysis, but one interesting thing I noted about FB is how its P/E ratio has been steadily declining for many years, despite revenue growth holding between the 40%-50% range. Mr Market seems steadily and increasingly pessimistic about FB's growth prospects (although it is still quite high), perhaps for the reasons you listed. The PEG based on past earnings growth slipped below 1 somewhere in mid to late 2016, or if we use Graham's more liberal formula of 8.5+2*growth, it would have slipped below the justified P/E before that, sometime around 2015. In this light, the sharp drop in FB shares seems expected. If the P/E was steadily declining when growth was so high, when growth starts to fall, the P/E will fall even more sharply.

Personally i think it pays to be careful with all these US tech names esp with macro entering new paradigm.

For the past decade, Fed has kept real rates -ve and the market has became a mostly momentum/growth play. Volcker rule also changed the market structure with banks out and algos increasing.

The turmoil this yr is, to me, largely abt the huge change in Fed stance to a "hike til something breaks" (as compared to Yellen's super dove) - this is also a function of Trump's stimulus @ backend of a business cycle raising odds of non-productive inflation spirals.

@some stage with real yields +ve, growth/momentum will hit a crescendo and everything reverses. Facebook/Snap/Insta/Twitter etc has also benefitted from bootstrapping of high equity valuations i.e. If Facebook is valued @ XXX, then IF this can garner just Y% then this can also be worth ZZZ! Solution of issuing using high valuation share swaps to buy revenue growth will also exacerbate eventual reversal, since the latter is normally not earnings +ve and hence valuation breaks once value paradigm returns and momentum fades.

Personally, I am not touching the entire sector - though i think Apple and Alphabet truly have value @ some stage; going short is not smart either since momentum can go on for longer than a shortist can stay solvent.

Something to add about where Facebook's spectacular growth is coming from. Facebook's business model is to let customers (advertisers) offer a bid for any or these three things - Impressions (views), clicks on ads and conversions (actions taken like checking out an item). When one of these happens, they have to pay an amount bidded by them. The higher your bid, the greater the intensity of these events will happen because Facebook will prioritize your ad, but Facebook will still let lower bids get some action. So on the ground, Facebook's revenue grows when these things either happens at a greater rate, or customers pay more for these things to happen.

The first would increase with more users, users spending more time on the platform, and increasing the ad load (the amount of ads on the user's page). In the past years, growth has been driven by all three. Facebook does not release data on how much time users spend on it, but it has noted that 87% of revenue comes from mobile. In fact, almost all growth since 2012 has been from mobile. Facebook has recently stated that it cannot increase the ad load without harming the user experience, and looking at my own Facebook I agree that any more ads would be very annoying. From 2014-2017, Facebook's active monthly users grew at 15% CGAR. Recently this growth has started slowing. Facebook's monetization of users has been growing even faster. In 2014 Q4, revenue per user was $2.81. In 2017 Q4, it was $6.18. This is an annual CGAR of 30%. How this happens seem to be mostly the result of the growth in Facebook mobile users, and some due to increased ad load (I'm basing this on the fact that the ad load on my Facebook have not grown exponentially while mobile usage has at a CGAR of 50.2%, and that the revenue from desktop Facebook has been flat since 2012). The growth in users and revenue per user has together at 45% led the increase in Facebook's revenue for the past years, between 36% - 52%. 

So where has Facebook's growth got to go from here? Facebook's active users at 2.27 billion as of the recent quarter. Interestingly, Facebook's active user growth for the past decade is linear, with users growing remarkably close to 210 million year on year every year. The mathematical effect of this is that user growth as a percentage declines every year. If this trend continues next year it will grow by 9%, then 8.5%, then 7.8% and so on. And what about mobile? From 2009 Q4 to 2016 Q4 (FB has since stopped publishing mobile active users), it went from 101 million to 1.74 billion, a CGAR of 50.2%. Just 30% more of that would be 2.26 billion, so mobile growth cannot continue above the rate of user growth. Going forward, it seems Facebook's revenue per user will flatten out. If we assign it say 7%, Facebook would grow at between 16% and slowly dropping in the coming years.

But there's a very big caveat here, which is the bidding process. Revenue may not not directly dependent to user growth and user time spent. If the value of Facebook's advertising per click, conversion or view is higher than the price currently being paid by advertisers, this means the current ad prices are depressed because of the ample user actions on Facebook. If the increase in user growth slows and actions per user (ie revenue per user) flattens out, this would squeeze the ad market and increase the price of ads. Advertisers would still pay if it's less than the value they receive. This means I'm looking at this the wrong way. Advertisers would pay Facebook based on how much value they get, now how many users are on it or how much time they spend. From an advertiser's perspective, the increase in user and user time on Facebook serves to drive down the cost of advertising as user actions are more plentiful. But when this stops growing, the price of ads will begin to reflect not how many users they reach but how much it is worth to them.

So possibly to really estimate Facebook's value and future growth, you have to look at how much value each user action has. If Facebook would be compared to a conventional business, each user is an unpaid worker who can leave any time he chooses, and the goods they produce are user actions. Their goods have been sold on a perfectly free bidding market. With their output flattening, perhaps the price of the goods will increase - it depends entirely on the demand of the buyers.