Facebook Stock is Undervalued (or is it?)

Someone asked me to take a look at Facebook’s stock this evening, so I took a page from Aswath Damordaran’s valuations class and did a quick equity analysis, borrowing a number of his assumptions. You can download my worksheet here (Dropbox Link).

My analysis generated an implied market cap of about $48 Bn.  The stock closed today with a market cap of $41 Bn. implying that the stock is slightly undervalued by the public markets.

So is it?

I’ll let you decide, but regardless it’s a very risky stock and the future for the company is hazy due to the nature of its business (online and mobile advertising) and the newness of the media (social). The same factors that make it a game-changer generate significant risk.  To me, doing a 10-year discounted cash flow analysis on Facebook is like trying to guess what cars will look like in 50 years,  you might have an idea but so many things can happen between now and then there’s really no telling.  With that being said, it’s helpful to ground the speculation with revenue and margin estimates. A few big questions to ask related to this:

  • Is the team going to figure out mobile advertising?  Effective CPM rates on mobile (the price to advertise)  are significantly lower than desktop
  • Is corporate management and communication going to level expectations with the public markets?  The ‘story’ has much to do with tech valuations.
  • Will users get bored and go elsewhere?

I’d love any comments on the approach, or any thoughts on Facebook’s stock value.


Pretty great.  Probably here to stay.  Not going to replace Facebook.

Before I say anything else about Google+,  I want to point out two great posts which put a lot of color around my thoughts, covering views from both architects’ and power users’ perspectives:

The first is a must-read article sent to me by Phil Shevrin (who also taught me how to organize my circles) about a researcher who left Google to go to Facebook named Paul Adams.  Paul conducted extensive research on people’s social graphs when he was at Google and his work helped design the user experience on google+, specifically the circles feature.   The presentation is long, but the insights are definitely worth your time.

The other article is a response to the user experience by Mark Hurst. It’s also very enlightening and echos a lot of my feelings on the platform.

While Hangouts and Sparks are important features on Google+, I’m really interested in the stream right now (inbound and outbound content), so here’s circles:


The idea for circles seems to be inspired by an idea that Paul Adams articulated well in his presentation:  the idea of grouping everyone together as “friends” without the ability to put our relationships into any sort of context is not an accurate reflection of how we organize our real-world relationships.   Our friends from high school are not the same as our family or our friends from work.  The circles feature on Google+ forces users to make decisions about their relationships by having them  assign their contacts into different circles.  This design is intended to allow users to control what content they share with whom; a tool that allows us to behave online more like we behave in the real world.

These are the circles I’ve created so far (my friends at GW need to pick up the adoption pace a bit…)

My Circles So Far

I think circles is a great idea, but not for the reasons that Google designed them.    Google intends for us to share content with select relationships,  but I am not ever going to share anything on Google+ that I wouldn’t share with everyone and I think I’m probably in the norm.  I’m just too concerned that I would make a mistake, accidentally overshare, etc.  I’ll keep my personal content in a (slightly more) personal channel: email.

What I do like about circles is that I can curate my inbound content. Like Mark Hurst says, my biggest complaint with Facebook isn’t that I can’t limit content sharing, it’s that I can’t easily curate my incoming content, so the most frequent posters get the main real estate in my stream (or I get fed the Top News algorithm’s best guess).  People who post less frequently end up getting buried; this also happens with Twitter.  Google+ allows me to easily toggle between professional acquaintances and family, so I don’t miss anything that I want to see.  I love that.  I think that people need to be educated about how to use circles in order to get the intended value out of them, but it’s a great stream control and I think people will like it if they invest the time to set them up.

Mobile App Is Terrible

One other thought, I think that Google+’s long-term success is dependent on their success in mobile.  If their iPhone application is any indicator of how they plan to tackle the channel, I am not optimistic that they will be an order of magnitude better than Facebook.  Their current application misses the value that circles provides: inbound content control.  Users can’t control which circles they read content from, it’s all jumbled together in the app and the only available sorting of “incoming” and “nearby” has no connection to the web product.  Right now, my entire Google+ iPhone app stream is filled with journalists.  That’s not useful:

Photos Are The Social Keyword

For most companies, there’s a gap between social media results and business results.  For example, growth of a fan page does not typically have a high correlation with an increase in sales, especially when you’re looking at short-term results.  I am not saying that a correlation doesn’t exist.  I think social media can generate business results, some of which are hidden on an income statement, but that’s a different conversation.  As a result of this gap between visible business results and social media activity,  companies often try to make sense of their efforts by benchmarking themselves against their competitors.

A company that I recently looked at had achieved some great results in terms of recent fan growth on Facebook, but wanted to get an idea of how they might better manage their social media presence moving forward to keep their growth rate up up keep their community engaged.

One of the drivers of both engagement and organic fan growth on Facebook is the fan interaction rate.   When fans interact with a brand’s content on Facebook, activity feeds on a user’s profile drive organic traffic to their Page.   I like to think of this as SEO for social.  When search became the emerging media, everyone wanted to optimize their websites for organic search results by dropping keywords and key terms on their pages in an effort to increase traffic from search engines. Fast forward to social: if you want to increase traffic to your social presence, getting your existing community to interact with your content is an effective tactic.

Below is a graph that shows what I believe to be a correlation between the amount of photo and video content that’s posted by a Facebook Page and the corresponding interaction rates for each.  This is pretty intuitive: photos get higher interaction rates then text alone when it comes to Facebook.

Here are the terms and definitions:

  • Page Size: Defined as the number of Likes on the Facebook Page, denoted below by the size of each bubble.  The biggest bubbles have the most “Likes” on Facebook, and the smaller ones less so.
  • Interaction Rates: [(Number of post likes + number of post comments) /  number of Page likes] *100.   For example, if a page has 10,000 Likes on Facebook and posts an update that generates 40 Likes and 10 comments,  that post would have an interaction rate of .5%: [(40+10)/10,000]*100=.5%.
  • % of posts that include photos: Looking back over a set period of time, finding the approximate percentage of updates that contain a photo or  video, not including link out thumbnails.

While I don’t think this is a particular shocking discovery,  I have been impressed to see that this correlation scales with Page size.   One would think that after a company gets into millions of Likes that interaction rates would fall because the denominator in the equation grows so large.   I’ve found that Page size has almost nothing to do with it.    Pages that post more photos in their updates tend to enjoy higher interaction rates, and higher organic growth rates as a result.

Facebook Fans are worth $136.38 per year

A new study was just released by Syncapse, a Canadian social media agency, that tries to calculate an annualized dollar value for a Facebook Fan,  and has landed on $136.38 per year.  Gigaom posted a great, quick writeup summarizing how this value was derived, and the folks at Syncapse have posted an easy to download PDF,  so I’m not going to regurgitate on this post what you can read elsewhere.  I think that the agency did a wonderful job performing their research and making their arguments, and because I think that the number number is a bit silly, especially as an annualized value.

There’s No Causality

The report hits the nail on the head by identifying that a Fan base is a self-segmented group of highly valuable customers.  That is absolutely true.  What is also true is that the majority of value accredited to these fans is based on the fact that Facebook Fans surveyed spend over $71/year more than their non-fan counterparts.  Well,  that’s great–  but it doesn’t imply causality. These consumers aren’t necessarily spending more because they are fans.  From a behavioral standpoint, I believe brand evangelists will tend to flock to communities where they can wear the badge of being part of the brand.  I’m a little less sure of the causality going the other direction.

Earned Media Is Still the Best Metric

Assuming this is true (the core fans flock to pages),  it presents a fantastic opportunity for brands to engage a core group of their ambassadors and get brand messaging distributed organically.  A more meaningful metric that Syncapse discusses in their report is the earned media value measurement.  The idea that Facebook Fan (being a brand evangelist) is likely to share content and spread brand messaging seems more valuable to me than stating that a fan spends more than a non-fan.  This word-of-mouth recommendation system is still the number one reason for any brand to exist in social media.  Organic fan and customer growth cannot be accomplished with media placements and Facebook Pages are a proof of concept that supports this idea.

According to Syncapse,  68% of Facebook Fans indicate they are very likely to recommend a product.  This is incredible news for brands that want to spread value through connections with their customer base.  The issue that most brands (and agencies) are suffering under with this new medium is that it does not scale to the levels of purchased media (Chris Brogan has good things to say about this).  My personal take is that,  often in traditional media you can reach scale of impressions while generating very few connections.  Social media (ideally) starts with connections and grows from there.  It’s a different approach, but highly valuable if leveraged efectively.

Part II: Facebook and Open Graph API

I’ve had a few insightful conversations over the past week on the Open Graph topic (I did a post on the changes, you can find it here.  I also recommend checking out this ReadWriteWeb article by Alex Iskold on the topic).  I’ve had a little more time to explore the subject, so the purpose of this post is to continue the conversation.

The stickiest topic has been about why Facebook would encourage an increase in off-platform activity by pushing to get  Like buttons on non-Facebook sites.  At first glance, it seems that an increase in these semantic bookmarks across the web might discourage marketers from establishing brand pages, applications and custom tabs on the Facebook Platform.  If brands can push content into Facebook users’ streams without having to develop extensive branded experiences inside Facebook, then they will be less likely to buy media from Facebook.  Yes, the value of community will still be important and Facebook Pages will still have value. But invariably brands want to be in users streams and they can easily accomplish this without a Page if Like button use is adopted.

So, there will be less need to buy Facebook media, unless Facebook starts serving ads outside of the platform, which it can easily do with the information it’s collecting:

If Facebook continues to collect user preference data from across the web, it’s ability to target you anywhere (as long as you are logged into Facebook) with relevant information on products and services that you will “Like” becomes a fairly simple process.  This presents a fairly elegant solution for Facebook, which is struggling (I believe) with the challenge of serving users advertisements when they’re ready to buy.  Right now, Facebook serves ads inside Facebook; and users typically aren’t interested in clicking out to make purchases elsewhere on the web (while click-through rates from the stream may be higher,  Facebook media historically doesn’t perform this function well).  If Facebook starts negotiating for inventory outside of its platform, the game changes significantly.

Facebook and the Open Graph API

I’ve wanted to write out my thoughts on the new announcements that Facebook made at their F8 conference; specifically the Open Graph API and how this will affect everyone involved with the platform.   I’ve been waiting to write this until I felt comfortable with the changes, and had the opportunity to build a few social media plans with them in mind.  I haven’t read many other people’s thoughts on this yet so, the following is the closest I can get to my unfiltered comments.

To me (and I think everyone), the most  important change that Facebook has made is to its social plug-ins (you can check them out here to be clear on what they are).  Some of these are new,  some of them are not new but are easier to install on an off-Facebook site (in this post I’m really just talking about the new “Like” feature).  These are all part of the Open Graph API that Facebook is pitching, under the presumption that people really want to connect and discuss the content that they are consuming in other places on the web. I don’t believe that position is far from the truth,  but I do think that there’s a limit to the amount of information that people really want to share with everyone all of the time.

What is undeniable is that this is a big strategic move on the part of Facebook, which continues to evolve into something less like a standalone world, and more like a collection of tubes that are ubiquitous across the web.  Here’s my breakdown of how this change affects major stakeholders:

Non-Facebook Publishers: I think this is mostly a good thing for most publishers. The “Recommend” feature that’s on cnn.com improves the experience on the site.  The “Like” feature can drive Facebook users back to consume on-site content that a reader’s friends “Like”.  These are good things for publishers who drive revenue by selling display advertising.  Are there risks?  I suppose this can take over other forms of sharing, and can become limiting to publishers who would prefer to have direct contact with their readers through actions like email sharing.  Also, any reader preference data shared through Open Graph is (I believe) stored on Facebook’s servers,  which is valuable consumer information that publishers may have to purchase from Facebook in the future.

Facebook Users: The Open Graph adds data to a user’s social graph on Facebook.  Users who “Like” content across the web can now send that preference data back to Facebook and express to their network that they  interacted with content and thought it was cool– the content can become an extension of someone’s personality (the way Pearl Jam’s Ten was an extension of my personality in junior high).  This social graph information is becoming content of its own and people like consuming it.

A dynamic social graph means that there’s always a reason to come back to Facebook to find out more about people: how they have changed, what they like, content recommendations, etc.  We can now get a more complete picture of a Facebook connection, and most users will think that’s a good thing.  The downside/risk is that users may not be interested in sharing all of their off-Facebook preferences and habits.  And, assuming Facebook users actually want to share this information, it’s possible that people’s streams will have a lower signal-to-noise ratio in the future– which can be bad for UX.

Marketers: Because Open Graph gives marketers better ways to integrate the platform on their sites, it possibly gives them less reason to develop immersive experiences on the Page and Tab structure inside Facebook.  These plugins might cannibalize Facebook’s biggest revenue generator, the “cost-per-fan” .  To get an idea of the difference in approach, check out this great example of an in-Facebook campaign; the Microsoft Kin campaign.  A great example of marketers using the Facebook Plugins is on the Levi’s website.

See the top red circle in the top image?  That is really well-integrated social bookmarking.  The result of a user clicking on a like tells my Facebook community that I like Levi’s.  The bookmark  allows me to comment, it gives specific data and the posting links directly back to the website, where my friends can like, or click out to purchase the product.

See the bottom red circle in the top image?  That’s how I can Become a Fan of the Levi’s Facebook Page.  Connecting to the Levi’s Facebook Page might get me a special discount, or some special content, but that’s really not clear to me from this button.  As a marketer, I would much rather have a user “Like” a product than “Become a Fan”.  What this will mean for “cost-per-fan” media in the future is anyone’s guess; I think it’s certain that these changes will affect development and marketing budgets from brands in the future.

Bebo & Ning: Second Place In Social Networks

Recent developments surrounding the world of  social networks are consistently pointing to a consolidation of social networks online.  Facebook currently touts over over 400 Million users.  It’s difficult to say how any users Twitter currently has.  The last numbers I saw were about 75 million, but I may be quoting an old stat.  Regardless,  these numbers trump Myspace and every other social network that has hit the web 2.0 scene.  On one hand, this is a story about the emergence of clear winners in the battle for clear market dominance.

The other half of this story is about social networks which are starting to falter, or admitting defeat.  Last week Ning announced that it was getting rid of free services and cutting 40% of it’s staff.  In even bigger new,  AOL has also announced that, two years after buying Bebo for $850 Million, the company will sell or shut down the site.  It’s becoming clear that a lot of second-tier networks are losing their user base and becoming ghost towns.

The emergence of a winner may have been inevitable.  However, I don’t have any interest in criticizing AOL for their acquisition of Bebo.  At the time of this transaction (2008),  social networks were still anybody’ game;  I believe MySpace was just over 100 million users at the time, 25% of where Facebook currently stands. In the social networking world network effects are profound, but as recently as 2008 the space was shaping up to remain fragmented, pulling in users of like interests and/or demographics very much the way forum-based communities still do.  If you were trying to establish a social media presence,  a brand or person used to build profiles on Friendster, MyYearbook Bebo,  Myspace and others.  When I was still working with record labels on social media strategy, we used to recommend web ubiquity, putting a profile on as many as a dozen social networks.  It seems that’s all over for now.

The 2007 social network world was killed largely by the sheer volume of consumers that poured into Facebook.   400 million active accounts is pretty much everyone when we’re talking about a place to put profiles.   But I’m not sure the world was a better place with the fragmented network system that we had before (the world of MySpace, Facebook, Bebo, NING, MyYearbook, Friendster, etc.). Yes, there were more choices and less restrictions for users, but all of these options are free for individuals so there’s not a price problem for consumers.  I think this presents some challenges for advertisers and I think this presents some serious challenges for developers.  Everything is platform dependent now and I’m not convinced that this is a good thing when it comes to Facebook.    Every time you get a clear market leader like Facebook, consumers and suppliers lose choice and the world becomes (just a little) less interesting.

Locking on Strategy: Apple & Twitter

I’ve been trying to identify a trend I’ve seen this week in my RSS feeds, told through the story of Apple changing rules on iPhone application analytics (Venture Beat), the much-discussed HTML5 vs. Adobe battle (I like this Scobleizer read which discusses it)  and  Twitter developing 3rd party applications for mobile applications and acquiring Tweetie (I downloaded the Twitter application for Blackberry yesterday and it’s excellent). It seems that the biggest innovators in technology are integrating and consolidating their channels.

It’s been interesting watching these companies shift strategies and jockey for space.  Apple has always kept a somewhat closed shop.  The recent exclusion of Adobe Flash from the iPad was a bold move on Apple’s part, but not entirely surprising considering the company’s history of being a vertically integrated firm that does not like becoming dependent on channel partners.

Watching Twitter and Facebook move around has been the more interesting story.  For the past year, Facebook has been redesigning it’s user experience to mimic Twitter’s model.  Status updates and tweets are a very similar now, and this is most likely the result of these platforms focusing exclusively on gaining advantage through network effects.   Twitter and Facebook have been dependent on content and users first, revenue second.   Now that they have both gained massive user bases and rapid adoption growth; the focus is turning towards revenue generation.

Facebook generated over $500 million in 2009 revenue, which came thorough display and performance-based advertising.   Let’s assume that Twitter is moving into third party applications in order to serve up mobile ads; is it enough to match the revenue levels that Facebook has generated?  The picture gets cloudier when you consider  the fact that Facebook made the majority of their ad revenue through 3rd party application advertisiers like Zynga.  The platform has already chalked up some revenue by licensing their search results to Bing & Google, and I believe there is more revenue down this path in the form  of brands looking for in-depth market research along the lines of what BuzzMetrics offers.

Another route is the sponsored tweet.  I’m not a huge fan of this model as a user or as a marketer–  I just think earned media should stay earned and buying people’s twitter feeds doesn’t seem like a scalable, sustainable model to me.  The fact is that Twitter is an unbelievably useful, intriguing and transformative technology. While I’m not certain what their revenue model is going to ultimately be, I imagine it will be a combination of the revenue models that we’re seeing now (some search, some mobile ads, some sponsored tweets). Regardless what their ultimate revenue solution is,  the platform is undeniably here to stay.

UPDATE: Twitter announced it’s model for rolling out sponsored tweets yesterday , and will discuss them in greater detail ad the AdAge Digital Conference, here in New York, next week.    I’m looking forward to seeing how these perform.  Clearly, opening a channel for  more mobile advertising is a big opportunity.

Facebook Leads Sharing, So Content Changes Forever

As someone who works in social media, our biggest driver for success is organic sharing of information and content. The chart below from Silicon Alley Insider shows what many of us already know on an intuitive level. Facebook is the epicenter of all things social:

I’m fascinated that sharing on Facebook is higher than email, although I guess we shouldn’t be surprised. The sharing function on Facebook is so easily integrated into the experience, it’s a natural evolution that it should become a center for sharing, seeing as how everyone, even my grandma, seems to have embraced it. But what are people sharing, really? I think it’s safe to say (in a broad-stroke kind of way) that people are sharing some type of content with one another. Whether it’s a video, an interactive application, a photo or an article- it all comes down to content being shared, and becoming more (or less) valuable as a result of that sharing. Which brings me to another point: as social networks become the drivers for content consumption and sharing, communication will change forever.

In the past, content consumption and advertising communication was a one-to-one communications strategy. Advertisers structured their creative, built out the assets needed for the media channel and disseminated that message to the masses. After the message was distributed, ads had done their job. Marketers would have to wait to see the results of their communications efforts, because people would digest the message, maybe discuss the content at the water cooler, and make a purchasing decision somewhere in the chain. This meant that commercials were designed to speak to the individual. For example, if you wanted to sell beer through television, you needed to create content that would speak to a large number of individuals. Bud Light is talking to me, hoping I didn’t change the channel or go to the bathroom, and measuring their success based on whether or not I buy their beer later on.

With community consumption, the rules are entirely different. Now the messaging is one-to-many, or one-to-community, and we’re all able to consume content together and discuss it in a very public way. The success of your content can now be determined almost immediately, and purchasing decisions will most likely be made not based on the content, but on the public response to the content. This is a totally different scenario– game changing. Think about how you behave as an individual, then think about how you behave in a group. I think Tommy Lee Jones pretty much nails in this scene from Men In Black. This also gave me an excuse to put a movie clip in my blog post:

How can we continue to create the same type of experiences that worked in television, and try to apply them to a socially networked society? The short answer is that we can’t. We need to be creative about the experiences we’re creating, because people are undoubtedly going to talk about it together.

Social Traffic Referrals

by Christian Brucculeri

I was reading Fred Wilson’s awesome blog the other day and I was inspired but what he said at the #140 conference:

“social media, led by Facebook and Twitter, will surpass Google in driving traffic to many websites sometime in the next year.”

I believe this will happen as well.   I believe we’re searching a little less than we used to.  Granted, when we want specific information (on a health topic, or for shopping) nothing can stop steamroller that is Google (no, not even you, BING), but when I’m just cruising along through my day,  I want to listen to my friends.

I do believe that Twitter is fast becoming a central traffic driver, as that’s essentially all I use the technology for anymore.  While I do enjoy the occasional status update from a friend, I’m more interested in the content people want to drive me to .  Even as I write these words it scares the crap out of me.  Why do I want to be part of someone’s organic search optimization attempts?  I’m not your sponsored search keyword, PPC victim-  so why do I want to click on your links?  Simple: I asked you if I could.

Every time I see a new Bit.ly link I want to see what’s behind it.  I want to see it because you’re my friend, or I find you interesting, or your a publisher I trust.    I know we might have just met, but I’m ready to click on you to see where you’ll take me,  because I believe you thought about it before you put that link up.  I honsetly trust that you stopped before hitting “update”  and thought “Shit, am i being annoying right now?  No, this is cool…let’s roll”.  This is light-years beyond an auction for a keyword, or a brand name buried in a BS blog entitled something like “getyoursiteoptimizized.net.au”.  So please, send me links in your tweets-  I’m interested…