True to its dour and slow-changing character, Cement, belatedly opened a Facebook account to sample the world of virtual intimacy. Facebook – in typical non-intrusive fashion – kept a watchful eye on Cement’s ‘Likes’. As humour ranked highly, it helpfully pointed Cement to avenues which catered to its personal tastes.
One fine day, Cement was surprised to see Facebook presenting itself.
The ramrod of relevance, paragon of privacy, social networking priest was in the market. Seeking $100 billion in market valuation from folks that ‘Liked’ it compulsively, every single day.
Would Cement be interested in investing?
Facebook humbly presented its alpha-CV. 850 million users, $4 billion in revenue, $1 billion in profit, in less than a decade. Stupendous growth in the number of users that liked Liking and paying real cash for virtual games. On this last mention, Zynga jumped in with gusto, indulged in some chest-thumping and encouraged Cement to play Cityville. Cement gently reminded Zynga that it indulged in playing real Cityville everyday. Zynga appeared displeased.
Facebook continued. It believed in a more open world where everyone was connected with everyone else, however meaningless the interactions might be. Ever the helpful Samaritan, it would sell highly relevant advertising. A great bulk of its revenue stream was tied intimately to the growth in online advertising, which was the future. It pegged the potential global advertising industry size at $600 billion.
Being a well-wisher, Cement felt compelled to consider the merits of Facebook’s plea.
It considered the possibility of every earthling using Facebook. How much would Facebook earn, if this materialised? Currently, earnings/user stood at ~$1. Allowing for Facebook’s remarkable appeal, Cement assumed earnings/user to grow to $5, in 5 years. 7 billion earthlings would help Facebook generate earnings of $35 billion, 5 years down the line. Today’s value of these juicy profits was about $15 billion. This valued Facebook at under 7 times earnings. Cheap, no? Never mind if only 2 billion earthlings currently used the internet.
Facebook made a mental note to make an earnest plea to every earthling alive…and considering what was needed to sustain the stock price, it contemplated soliciting support from dead earthlings and non-earthlings as well.
Cement then allowed for the possibility of Facebook capturing half of the global advertising market, a long long shot. This would put Facebook’s revenues at $300 billion, nearly 3 times Apple’s and 8 times Google’s current revenues. If past profit margins persisted over the next 5 years – another long shot – earnings would be $75 billion. Today’s value of this Alice-in-Wonderlandish situation was $30 billion. This valued Facebook at a paltry 3 times earnings. Cheap, indeed.
Stiff requirements but this was Facebook. Nothing seemed beyond the realm of possibility.
Potential investors would be betting on (praying for) Facebook to be the next Apple/Google, several times over.
As a well-wisher however, Cement reminded Facebook of the Greater Fool Theory and to never underestimate the power of irrationality and herd-behaviour. It also lauded Facebook on timing the public offer to perfection. It was sure to warm existing sellers’ hearts.
At this juncture, the ghost of Orkut manifested and quivered resignedly. It served as a shining example of how social networking could go wrong, when competition exposed its many hidden weaknesses. MySpace, on life support, too made a guest appearance and shared how it lost 95% of market value since 2006.
Facebook, undaunted, focused on subtly appealing to the greater fool. It tried to forget that it might need every earthling to sign up and swim in Facebook for the next 5 years, or be immensely profitable in the very least; to justify the price it was requesting from investors.
On returning to its dusty milieu, Cement wondered how real users shelled out real cash for playing virtually, often for little real rewards. Zynga’s coup was praiseworthy indeed. Credit was due to Facebook for its tremendous growth in the past and its achievements but partaking in the business at its offered price was a completely different proposition.
Cement grinned at the oddity of life. A brick and mortar entity – Cement – was sometimes valued at less than the cost of tangible assets; while GenX intangible offerings carrying the promise of stupendous growth were welcomed warmly. The world and investor Likes had changed. Hard asset plays often landed on hard asses.
As a nearly extinct Facebook user, Cement wished Facebook and, more importantly, its eager prospective investors the very best and promised to hit at least 5 Likes everyday, which was higher than the current average Like hit-rate (3 Likes/user/day).
As for its participation in the public offer, Cement’s Like was unLike-ly.