New York Times Sale and Microsoft Write-off are More Bad News for Facebook
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While Facebook (NASDAQ: FB) issued precious little guidance about its future prospects in its recent earnings call (which was obviously done for a reason), insight can be gathered from The New York Times (NYSE: NYT) recently selling its About.com unit at a substantial loss and Microsoft (NASDAQ: MSFT) writing off the entire purchase price of aQuantive.
Both aQuantive and About.com were acquired to increase the online advertising revenues of Microsoft and The New York Times, respectively. This is a key area of projected earnings growth for Facebook. Both were abject failures, by any measure. Bought for $410 million in 2005, The New York Times is selling About.com to Answers.com for $270 million. Microsoft wrote off the entire $6.2 billion purchase price of aQuantive, an online advertising company it picked up in 2007.
When Facebook went public in May of this year, there was an assumption of an eventual valuation for the company of $100 billion. For that, Facebook will need to trade at 33 times advertising revenues. Google (NASDAQ: GOOG), now trading around $653 a share with a market cap of about $210 billion, is based on 5.5 times its advertising revenues. Apple (NASDAQ: AAPL), at $627 a share, is valued with a market cap of around $580 billion, with it currently trading around 3.8 times the sales of advertising services. Utilizing this metric, Facebook would be at valued at $15 billion, or about $7 a share.
About.com "...was one of the first websites that made content specifically tailored to answer questions that people typed into Google Inc's search engine." Advertising revenue is earned from businesses that pay to be displayed prominently when a related search is entered. As an example, when "hang drywall" is the search phrase entered on About.com, websites for a number of companies in the business are returned. If you click on the Ask.com response, even more drywall installer websites come up with the next page, along with YouTube videos.
That is where Facebook wants to be and needs to dominate in order to reach its $100 billion market capitalization. When you type in "hang drywall" as the search term for Facebook, a host of drywall installers is the response. It is tough to figure out the competitive advantage of Facebook in this crucial area as About.com and Ask.com are dedicated sites for answering these types of questions while Facebook is a social media concern. There are certainly no shortage of others in this sector, too, such as Angie's List, another social media disaster for its shareholders.
The New York Times sold About.com for about one-third less than the purchase price. That is a bargain compared to the 45.80% price plunge for Facebook, year to date. There is now a 13.46% short float for Facebook, which is amazing for a company that just started trading on May 18 with 33 investment banks in the initial public offering syndicate and Morgan Stanley at the lead.
Even more foreboding for Facebook is that when the financials of social media competitors such as Angie's List are examined, it becomes very obvious that to attract advertising clients, massive marketing amounts must be expended. For Angie's List, according to one analyst, "When applying the cost per dollar of revenue formula to our spreadsheet, we discover that ANGI is currently spending about $1.65 per dollar of revenue assuming an angry, rapidly decaying customer base, or $1.96 per dollar of revenue assuming a loyal, slowly decaying customer base. These figures only include sales & marketing expenses, so even if ANGI spent $1 per dollar of revenue, they would still be losing money."
How ironic: More in advertising dollars has to be spent than the advertising revenues obtained...tough to make that up on volume!
That has certainly been the story for both Microsoft and The New York Times. About.com was not sold at a loss of $140 million by The New York Times and the $6.2 billion cost was not written off by Microsoft for aQuantive due to each being profitable, that is for sure. Obviously, neither Microsoft nor The New York Times saw any chance for a reversal in either entity happening anytime soon.
This is a very telling lesson for the future of Facebook. Both The New York Times and Microsoft are much more established. Each has also been operating online, attempting to develop a solid advertising revenue model. Both Microsoft and The New York Times failed at great cost to the shareholders of each. It is difficult to envision a different fate for Facebook.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.