Facebook Overvalued, But Excellent

A few months ago, I mentioned how I believe Facebook’s valuation of $65 billion was unjustifiable. But the valuation continues to grow. According to recent estimates, the company is now valued at close to $100 billion. Given that Facebook’s revenue model remains largely unchanged, my lack of resonance with such high valuations persists. Many ask at Silicon Valley parties these days: Is there a bubble? Well, yes, there is. That doesn’t change the fact that Facebook is an excellent company. It is, however, overvalued.

Facebook’s Financials
Recent market estimates project Facebook’s advertising revenues to be in excess of $2.2 billion for the current year, outpacing Yahoo’s lead in online display ad revenues. For the year, Facebook is projected to own 17.7% of the U.S. online display ad market, compared with the 12.2% share recorded last year. They are expected to be on track to report earnings before depreciation, taxes, and interest of more than $1 billion this year, though some believe that it is headed to cross the $2 billion EBITDA mark this year.

The number of unique visitors to the site continued to increase. According to comScore data released last month, Facebook was the fourth most visited site in the U.S. in July, with 162 million unique visitors. The number has been increasing from 160 million in June, 157 million in May and 145 million in July last year. They are still lagging behind Google, Yahoo! and Microsoft, which claimed 215 million, 182 million and 178 million unique visitors last month, respectively.

Despite growing ad revenues and increasing viewership, Facebook’s subscriber growth rate has slowed. The company added 11.8 million new users worldwide in May, compared with 13.9 million new accounts in April, both of which are far fewer than the average of 20 million new users per month added over the past year. By the end of July, Facebook had more than 750 million subscribers.

Facebook Video
Facebook continued to focus on increasing user engagement. Earlier this year, they entered the online video content segment. They expanded their collection by tying up with Miramax Films. Miramax will make 20 of the studio’s movies available to rent on Facebook. The available library will include hits such as “Pulp Fiction” and “Kill Bill” and will be available to view on a Facebook page called Miramax eXperience. The movie rental will cost a subscriber $3 for 48 hours. Facebook is expected to take their 30% share in the revenues.

In July of this year, Facebook was the third-largest website for viewing videos online with more than 51 million unique video views with an average of 17.9 minutes per viewer. Google was the leader in the segment with over 160 million views across its sites with an average of 353.7 minutes per viewer. Google’s phenomenal lead is primarily attributed to YouTube’s strong presence in the segment. Facebook clearly has a lot of ground to cover.

Facebook Games
They also enhanced their Games offering by adding features such as enabling users to view a separate stream of their friends’ game activity, scores, and achievements in a ticker. The feature is aimed not only at getting users to engage with their friends through the games; it is also an attempt to convince users to try different games that their friends may be playing. Further, Facebook introduced a feature that lets users expand to a full screen when playing games.

Facebook Mobile
Facebook introduced Messenger, a new mobile app that is designed to simplify messaging by providing a faster way to message friends and small groups. Messenger delivers messages through notifications and texts through Facebook and can be used to reach all friends on both Facebook and on phone contacts.

They made a significant enhancement by offering video calling through Facebook. Together with Skype, Facebook introduced video calling built into chat so that all conversations start from one common place. Users can call friends, engage in chats, or enter a video call through the same message box. Video calling will be available in more than 70 languages worldwide.

Facebook’s Acquisitions
Facebook continued to grow its capabilities through acquisitions during the year. They recently acquired Sofa, a software and user-interface company, and Push Pop Press, a provider of publishing software for touch-enabled devices. Amsterdam-based Sofa is known for their Mac applications and e-commerce products. The company has their own design team to build art, icons, and interfaces for a client list which includes Mozilla and Tom Tom. Push Pop Press was founded last year by former Apple employees to create newer digital books. To date, they have published only one book, former vice president Al Gore’s “Our Choice.” However, the book is known to have some impressive multimedia features such as photos, videos, interactive maps, and infographics for the iPad. Though Facebook hasn’t revealed any plans of launching any digital books, the acquisition has brought them a strong design team.

Finally, Facebook delayed IPO plans further, and the company is now expected to become public by the first quarter of 2012.

By 2020, Facebook could penetrate a significant chunk of the more than 5 billion Internet users expected to come online. The valuation bubble is, to an extent, in anticipation of that immense growth potential.