The Facebook Investors Have Been Waiting For
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It almost seems like a weird dream, or rather nightmare, at this point. Its hard to believe that Facebook (NASDAQ: FB) actually IPO'd for $100 billion and then tanked. Analysts were mystified. Bankers were getting sued. People were losing life savings...
Yep, it happened. I wasn't a fan of Facebook from the beginning. My reasoning was, call me old fashioned, Facebook did not know how to make money. They knew how to raise money and spend money. But make money? Please. That was not what they were good at.
But recently Facebook has caught my eye. There have been a few subtle things happening, and they've got me believing that Facebook could actually turn into a cash cow, or a goose that lays golden eggs. Whichever comes first.
The old days
For the most part, Facebook has been getting its revenue from one source: ads. In 2011 Facebook made 85% of its money through advertisements. That sounds troubling, but we should be quick to note that competitor Google (NASDAQ: GOOG) got a whopping 96% of their revenue from ads in 2011.
Now when I say the old days, I do not wish to suggest that Facebook is getting away from advertising. On the contrary, the third quarter of 2012 showed that Facebook now gets 86% of its revenue from advertising, and that actual revenue increased in that category 36% over 2011.
I have nothing against advertising. Facebook is obviously doing pretty well here. But as an investor it was hard for me to imagine a time when Facebook would grow advertising to a point to merit their lofty valuation of $100 billion. For this company to ever deserve that kind of valuation in my mind, they needed to find some other revenue streams. We knew that they wouldn't charge to join Facebook. That is FB promise number one. They were going to have to get creative.
Get creative they got. Facebook has been working on a variety of ways to bring in more revenue.
We have all seen that little button that allows us to promote our posts now. This handy dandy feature will allow you to put your post at the top of your friends' feed. At first this seems like a completely pointless option to anyone who is not a politician or a business. But think about: does anything happen in your life that you want everyone to know? Maybe you just got engaged, had a baby, your band is opening for Maroon Five, or you just read a really cool article on the Motley Fool. You want all your friends to know. Therefore you hit the little promote button.
Pricing varies, but some reports say it costs an average of $7 a post.
Rumor has it that there is a new email option coming soon. Email your friends: free. Email your non-friends: not free. The rumors for the cost of emailing someone who is not your friend on Facebook vary from $1-100. Supposedly, this fee is to cut down on spam. Spammers aren't going to want to pay the dollar...or one hundred dollars to litter your inbox. But while spammers won't, is there anyone who would pay to email somebody on Facebook? Many businesses are willing to pay postage to deliver mail to your mailbox. Why wouldn't they want to pay to deliver mail to your inbox?
Finally gaming hasn't been what Facebook had wanted, but it's important to note that their ties with Zynga (NASDAQ: ZNGA) are diminishing. Zynga's payments to Facebook are down 20%. However, this doesn't necessarily mean that gaming is bad. In fact, a decreased dependency on Zynga could be good for Facebook. Other companies such as Wooga and King.com increased their payments by 40%. This new game environment on Facebook could begin leading to some pretty tight competition. Competition could drive better games. Better games could lead to more users.
The power of big numbers
What should really turn your head is the over 1 billion users. None of the revenue initiatives mentioned above are big ticket items. The question I want to ask is this: What would happen if Facebook could get just 1% of its users to promote just one post per year? The answer: they would add $70 million in revenue.
When you are talking about a company that has over a billion users, even little ticket items can translate into big profits. This I knew from the beginning. But I wasn't seeing Facebook coming up with any good ideas. But now things are different. Facebook is coming up with some ideas on how to make some cash.
Facebook still totes a pretty crazy p/e ratio. At 161, it's one of the pricier stocks out there. But they have finally given me some reasons to start believing that they are worth it.
thequast has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!