As I am sure you are by now aware, Facebook began selling its stock on the public exchanges as of today (May 18, 2012). Its initial public offering (IPO) raised about $16 billion, making it the second largest IPO in history (behind Visa’s, a few years back). Its leading founder, the face of Facebook if you will, Mark Zuckerberg, is richer now than just about everyone, with almost $20 billion in personal wealth, the rough value of his Facebook holdings. The IPO price values the company at roughly $100 billion, which is about one-fourth the value of the largest non-government oil and gas producing company in the world, Exxon Mobil.
It might be a profitable exercise to compare Facebook and Exxon Mobil more carefully, and see how the two stack up.
Facebook is not another internet company that is selling itself before it even produces any revenue, such as was the photo-sharing application company, Instagram, before it was purchased for a billion dollars. By Facebook. Facebook has revenue. Over the last four quarters, it generated roughly $4 billion dollars of revenue (a billion dollars per quarter), or, taking its claim to have 900 million discretely identifiable users at face value (pardon the pun), it managed to generate a bit over a dollar in revenue each quarter for each of its users.
Exxon Mobil, on the other hand, has generated in excess of $100 billion dollars in revenue in each of the last four quarters.
Exxon Mobil’s revenue per quarter is over 100 times that of Facebook, but its market capitalization is only four times that of Facebook’s.
Facebook had no net income in three of its last four quarters. It earned $137 million of profits in the latest quarter (ending March 31, 2012), which represented a profit margin of roughly 13%, on sales of a little over a billion dollars.
In Exxon Mobil’s latest quarter (ending March 31, 2012), it generated net income of $9.4 billion on sales of $110 billion, for a profit margin of about 8.5%. Over the last full fiscal year (2011), Exxon Mobil generated $41 billion in profits on sales of $433 billion, yielding a profit margin of roughly 9 %.
For the quarter ended in March, 2012, Exxon Mobil generated almost 69 times the profit generated by Facebook. For the three prior quarters, Facebook generated no profits to Exxon Mobil’s roughly $30 billion.
Yet the paradigm of perfect competition that is the stock market values Facebook’s quarterly $137 million in profit at one-fourth the value of Exxon Mobil’s $9.4 billion.
Facebook claims 900 million discrete, individual users. That leaves roughly six billion souls on the planet that don’t Facebook. As previously noted, Facebook has thus far generated an average of a little over a dollar in revenue per quarter, per user. If all the remaining six billion humans get a Facebook page, and each new Facebooker generates money at the same rate as its existing users, Facebook will gross roughly $7 billion per quarter. If profit margins can be increased to 20% (just assume, for argument’s sake, and because the math’s easier), then Facebook will turn a profit of roughly $1.4 billion per quarter. Its annual sales, if every human on the planet gets a page and its revenue per user stays roughly the same, would be $28 billion, out of which it would generate $5.6 billion in profit, assuming an increase in gross margins to 20%.
In other words, if Facebook’s popularity grows as high as is humanly possible, with every last human on the planet wasting more time on Facebook than is already the norm (explaining the increased margin), Facebook will still only generate about half as much profit in a year as Exxon Mobil does in a quarter.
Exxon Mobil’s growth prospects are uncertain. As noted previously, it is already the largest non-government oil company in the world. While it might not have much room to grow, it needn’t necessarily decline any time soon.
You might object that comparing Facebook and Exxon Mobil is like comparing apples to oranges, which is correct, to a point. Facebook and Exxon Mobil do two entirely different things. But they can be compared because they share a similar valuation metric, i.e., dollars. Dollars are fungible. A dollar invested in Facebook is a dollar that could instead be invested in Exxon Mobil.
Exxon Mobil generates 100 times revenue the revenue and 69 times the profits of Facebook, yet its market capitalization, i.e., the aggregate value the market deems is its worth as an ongoing enterprise, is only four times that of Facebook.
While Facebook’s valuation appears, on its face (another pun, sorry), outlandishly irrational, Wall Streeters peddling Facebook stock fully understand that only fools doubt that of the two tools–reason and emotion–available to men for engaging and understanding the world, emotion wins out every day. There is an emotional fool born every day. Facebook figured out how to turn foolishness, both in the users of its service and in the speculators of its prospects for its future growth, into money for itself. Bully for Facebook.
It’s hard to imagine the valuation will last much longer than it took the initial investors to cash out.
Apparently failure for an IPO to “pop” (to increase dramatically in value) on its first day of trading should now be known as a “market glitch”, or at least that’s what a Wall Street Journal article blamed for Facebook’s quick plunge back to its $38 per share opening price (which required the intervention of its underwriters to hold), after it very briefly popped about 11% up. No word yet on how the impending plunge will be renominated to suit the suits on the Street such that the average Joe can get over his emotional pain at losing his shirt on another pie in the sky dream for riches.