This article was originally published on May 13th 2012 in Japanese as part of my weekly column for Sankei Business-i.
Facebook will IPO at a valuation of nearly 100B USD. That’s a lot of money. Facebook is IPO’ing at 25 times revenue. High even for companies that have been public for some time with stable business models. Most companies IPO at four times their revenue. Clearly the company is not worth 100B today. The value is based on the belief of what they will be worth in the near future.
To put things in perspective, Facebook believes that it is 1/5 the value of Apple. More than 1/3 the value of Microsoft and 1/2 the value of Google.
The company makes a lot of money from advertising but they also have a very serious problem with their advertising platform. It doesn’t really work that well.
You can’t do that on Facebook now. But if facebook successfully executes on building out the advertising platform, eventually you will, and when that happens the Facebook will immediately become more valuable. In the meantime there are companies like SocialFlow <http://www.socialflow.com> which allows brands to target users in real time based on conversation matching. If you have content or a coupon related to Hawaii and there is a sudden increase in discussions related to Hawaii, that content will go out automatically to channels like Facebook and Twitter. Then there is Klout which can graph the activity of users but looking at their discussions and rank their interest and expertise within categories. So an advertiser could potentially target only people who have shown an interest in travel, not based on what they have defined in their profile, but based on the conversations they have had in the past and content they have shared with friends. Technology like this will power the future of real time marketing and advertising. But the leading companies perfecting this aren’t the social networking platforms themselves. Investors are betting that Facebook will eventually build in the ability to monetize every action a facebook user takes, but we have no idea how good they will be at it. Facebook has to build a platform that will keep one billion people happy. They are not a advertising company. It’s not clear how much effort they will place in advertising in the future. Now that Facebook has launched a mobile application platform. Similar to iTunes iPhone app store. One has to wonder about their commitment to monetizing their most valuable asset, the user data they have now. There are two monumental tasks facebook has to manage to continue building value. First they have to figure out how to monetize user data if not in real time than based on historical data. Second they have to keep users interested in facebook because if users aren’t using facebook, you can’t very well advertise to them. Luckily Facebook is so large that even if they improve their advertising targeting ability by 20% it’s likely to have a large impact on revenue. Unless of course people stop using facebook. Its a risk buying stock in a company so young with such a high valuation. But people were complaining about Facebook valuation when it was valued at $99B less. They have done a good job proving they can monetize users so far. It would be hard to bet against them, even at 100B.