July 6, 2011 | In: Opinion

What If People Lose Interest in Facebook?

Probably every investor at the moment is eying the Facebook IPO. Everyone knows that the stock can skyrocket in the first few days and everyone wants to invest and be part of this new social revolution. The “social revolution”, however, is a two edged sword. Revolution always means that there is an imminent change, which means that as long as there is a social revolution, there will always be yet another change in the way people socialize with each other and meet each other.

Let’s look at how people socialized online in the last decade or so:

- Before 2004, people used to socialize on forums.
- Between 2004 and 2006, people socialized online using blogs.
- Between 2006 and 2007, people used websites such as MySpace, Bebo, YouTube, etc… to socialize.
- Between 2008 until now, people used Facebook to socialize casually, and LinkedIn to socialize professionally.

As you can see, people’s moods are constantly shifting. Who can guarantee that people will not use another website/mean to communicate online in 2 years from now, making Facebook and LinkedIn completely obsolete? After all, both of these websites can be cloned, and maybe someone can come up with a clone even better than the original.

Real investors, when purchasing stocks, purchase it on the basis of the future (and not the current) prospects and potential of the company (if you have doubts about this, just take a look on how investors are treating RIM despite its current earnings).

Now let us examine 3 things: How much Facebook is currently earning in revenue, how much will it earn, and how long should it exist just to pay back the investors. By examining these 3 things, we will be able to assess whether Facebook is an attractive investment or not.

In 2010, Facebook earned $1.86 billion. Which is a decent number, considering the inventory of ads consists mainly of spam and some Zynga trash. In 2009, that revenue was around $1 billion. Note that we’re talking here about revenue, and not profits. Profits are around 25% of that number. Which means that in 2010, Facebook made a profit of $500 million, while in 2009, Facebook made a profit of $250 million. In any case, that’s a 100% increase every year. But we all know, that this 100% increase in profits cannot be sustained every year. Let’s assume that Facebook will be able to increase its profits by 20% every year for the next 5 years, and then stabilizing at an increase of 5% year over year (I think this is a very optimistic calculation):

Year Revenue (in million of dollars)
2010 500
2011 600
2012 720
2013 864
2014 1036
2015 1244
2016 13061
2017 1371
2018 1440
2019 1512
2020 1587
2021 1667.
2022 1750
2023 1838
2024 1930
2025 2026
2026 2127
2027 2234
2028 2346
2029 2463
2030 2586
2031 2715
2032 2851
2033 2994
2034 3143
2035 3301

The above table represents Facebook’s very optimistic revenue over the first 25 years, which will total around $48 billion. Let’s assume, to make the calculation easier, that Facebook’s revenue for the first 25 years after the IPO is $50 billion. Several weeks ago, I estimated what will Facebook be worth by comparing it to LinkedIn, and the number was a minimum of $85 billion. Which means that if the growth of 20% over the first 5 years and 5% over eternity is sustained, it’ll take Facebook 34 years to pay back the investors. A bit high, but we’ve all seen worse (LinkedIn has a P/E of over a 2,500!).

Now, we are forgetting one very important thing, Facebook is a website! Even worse, Facebook is a social website! What will happen if in 2 years from now people will start deserting Facebook (if you think that this won’t happen, take a look at myspace, bebo, etc…)? This can easily happen. Facebook by then won’t be worth even a billion. That’s why Facebook’s execs want that IPO, they want the largest amount of money they can get, and they want it fast, because they know that this game will be over at one point or the other. Facebook’s reason to exist is that people like using it at the moment, but we all know they may stop using it at any moment.

So will Facebook be a dangerous stock? Not at the time of the IPO (I think it’ll be much safer than LinkedIn). But you should sell (or even better, sell short) your Facebook shares as soon as you feel that people’s interest in this social network is dropping.

1 As of 2016, year over year increase is assumed to be 5%, as Facebook’s growth will be tamed since everyone that should be on Facebook will be on Facebook by that time.

Note: This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

6 Responses to What If People Lose Interest in Facebook?

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Why Is It Not Wise to Delay the Facebook IPO « Fadi El-Eter

October 10th, 2011 at 2:39 pm

[...] things that happen there, such as harassment, stalking, etc… Not to mention that people may just lose interest (MySpace, [...]

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Investment Strategies for 2012 « Fadi El-Eter

December 6th, 2011 at 6:13 pm

[...] smart thing by buying Facebook stocks at IPO. In fact, that you would be the stupid thing to do. What if people don’t like Facebook anymore? Have you ever thought of that? Note that I evaluated Facebook at almost $100 billion myself (well [...]

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Jona

April 14th, 2012 at 3:48 pm

Problems: 1. Profits not Revenues, to correct your terminology in the analysis; 2. Profits were $606 Mil in 2010, versus your analysis at $500; 3. Profits in 2011 were $1.0 Bil in 2011, versus your analysis at $600 Mil. Your analysis is founded on false, incorrect data.

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Fadi El-Eter

April 16th, 2012 at 7:29 pm

Hi Jona,

I think you’re wrong – I have also cited a source in my post, please check it. I’m pretty sure I’m talking about the Facebook revenue and not profits.

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Michael Parness

April 25th, 2012 at 2:26 pm

Your analysis, while anything is possible, is very unsound and unusually biased. Comparing Facebook to other social networks that haven’t worked is inherently wrong. You’re making an assumption that Facebook will become almost obselete. 5% revenue growth? This year they will have more revenue then you are projecting they’d have 2035. They will have north of $5 BIL in revenue in 2012 easily. Most analysts project nearly $6 BIL, but even if they had $4 BIL it’s higher than you project in 2035. In fact, in 2011 they had higher already than your #s in 2035. Further, you are assuming they will become obselete, fine, that c ould happen, however it also could happen that they expand their platform and start to rev up because having 900 MIL people as an audience could allow you to compete with Google for search revenue (they are partnered with MSFT already and so BING is likely to be used as search and since 500 MIL people already use Facebook everyday, it makes some sense that many of those would simply search from their Facebook page, rather then switch over to GOOG. What about Netflix movies on their Facebook page? Reed Hastings is on their board of directors already. What about online auctions targeted to other members, or sales through vendors which they could at some point charge a fee for. The list COULD go on and on. Bottom line is, no one knows what will happen ten years from now, but you are making assumptions that people used to make about GOOG if you recall. And people even made about AAPL in terms of the IPAD (MSFT failed with tablets, so would AAPL, or others would take market share, which clearly isn’t happening anytime soon). Naysayers always point to MYSPACE, but MYSPACE never had any revenues, and peaked and than died. Others have tried (GOOG) to compete with FACEBOOK but first mover status is huge (EBAY, GOOG, AAPL) in any business if they can gain critical mass (is there an argument that they have?). I really could care less, I’m a trader not an investor (though I do own some Facebook shares at $13 each for full disclosure), but as much as I enjoy analysis, I think you should at least offer a counter scenario that COULD happen. Maybe you will be right, but there is always the possibility that you could be wrong, don’t you think? Or, are you definately going to be right? Best of luck always, Michael “Waxie” Parness

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Fadi El-Eter

April 26th, 2012 at 5:08 pm

Hi Michael,

Fair points!

I think this post stems from my distrust of social media as a business – Facebook is making money but is not worth trading at a P/E more than 10, IMO, nor any other social media company. The market will value FB at a P/E of 1,000 (similar to LNKD), which I think is wrong. Facebook may or may not exist in a decade from now.

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