Cheery Consensus for This Social Networking Site

By Anh HOANG - October 24, 2012 | Tickers: FB, LNKD, RENN, YELP | 0 Comments

• Email
• Print

Today one global phenomenon, which is mentioned over and over again, is Facebook (NASDAQ: FB). At the beginning of the month, Facebook has hit the milestone of 1 billion active users. It now has the third largest population in the world, only after China and India. The number of users on Facebook is 3 times higher than US population. People use Facebook to share pictures, feelings, and events to relatives and friends. That is Facebook’s power, a sophisticated spider web of social networking and private users’ data. And, it actually owns the users’ data. 

Facebook’s model of monetizing its database to bring more value to shareholders has been questioned. And right now, it is valued at a $41.78 billion market capitalization, a drop of more than 50% since its IPO. However, its recent third quarter earnings seem to be more promising. The reported revenue was $1.23 billion, an increase of 32% compared to the same period last year. Its adjusted EPS was $0.12, higher than the average estimates of $0.11. A big chuck of revenue growth was from advertising revenue, with $1.1 billion. And 14% of that was from mobile advertising. Many analysts thought Facebook would only produce around $50 million from mobile ads for the quarter, so the $140 million was a surprising result for investors.

As of Sept. 30, Facebook had $1.01 billion monthly active users (MAUs), 26% higher than its same period last year, whereas daily active users and mobile MAUs were 584 million and 604 million, with year-over-year growth of 28% and 61% respectively. How about the users’ value that the market is placing on Facebook and some of its peers, including LinkedIn (NYSE: LNKD), Renren (NYSE: RENN) and Yelp (NYSE: YELP).

From the comparison table, we can see that the most expensive value per user is LinkedIn, the professional social networking site, with $62.90 per user. That might due to the fact that LinkedIn is known for its ability to monetize its sticky user base. Facebook ranks second with $41.37, the lowest value is Renren, the social networking site in China. For social networking sites, the more people that are using them, the more condensed the social spider web is, and the more people will be likely to come back to them again. So Facebook has that advantage, with the number of users nearly 10 times higher than LinkedIn and Renren.

How about the traditional relative valuation?

LinkedIn is the most expensive with a 909x P/E and a 14x P/B, whereas Facebook ranks the second in valuation as well, with a 126.6x P/E and a 3.1x P/B. Yelp’s earnings are not positive, so the P/E ratio is not valid.

My Foolish Take

All four social networking sites seem to be quite expensive in terms of traditional valuations. Among the four, Facebook takes the lead with 1 billion monthly active users. But how to monetize the database successfully is another question. The high P/E ratio means that the market believes in the extraordinary growth of Facebook in the future. But if Facebook could not grow earnings as expected, and the future is never clear, investors are paying a very high price for uncertainty. 

Know What You Own

After the world's most-hyped IPO turned out to be a dud, most investors probably don't want to think about shares of Facebook. But The Motley Fool has outlined some things every investor needs to know about the company in a new premium research analysis. Access the report now by clicking here.

• Email
• Print
• Feedback