Where's the profit? Facebook and Sina searching for an answer

I remember when many people asked how Yahoo! and other early web companies could make money. Their content was free and their earnings in the late 1990s were very small. However, earnings did come in and for people who bought (very) early or after the crash, they even bought at a decent price. Today, some web companies are relatively cheap, such as in the social gaming sector, while others such as Facebook are expensive. I say this because some of the social gaming stocks that trade overseas have very low P/Es (and pay dividends!) and a stock such as Zynga (ZNGA) is trading at 20 times 2013 earnings. There's obviously a lot of risk involved, but I don't believe analysts are able to correctly value these companies, nor are stock market investors. These firms experience extremely rapid growth and I invest as if they were options—they will have a binary outcome, either they make it or they don't. If they make it, they will be earnings estimates for years on end, while if they fail, at best they will be sold for their assets.

Of course, while there are very interesting investments just below the radar screen, everyone is focused on Facebook and Twitter because they're huge and Facebook itself is the ecosystem for a large amount of social gaming. There are plenty of articles about Facebook, but I wanted to highlight a negative one and a positive one. The first one, Failbook’s Epic Fail: Does Zuckerberg Want Users To Pay?, comments on an article in the BBC, Facebook tests 'pay to promote post' tool. The author has a low-ball valuation for Facebook and sees this revenue attempt as negative. I think web companies often experiment and as long as it's not a major strategy for a company, they can survive many failures. However, I think it does signal that Facebook is looking for revenue, especially now that they're a public company. Will the shift in psychology harm the firm?

The second article takes a more positive view. Facebook's Value: What's the Price of a Billion People Watching Each Other? Facebook is a huge force on the Internet and has pursued what I would call a Google-like strategy: become the Internet. Facebook wants to remain the social networking platform. Whether that eventually translates into enough profit to justify its valuation is another story.

Twitter isn't public, but Sina's Weibo faces similar challenges to profitability. Sina Weibo's Fretful Hunt for Profit Platform
Despite an enormous user base of some 300 million microbloggers across China, Sina Weibo is losing money. And its executives are fretting.
Sina is important to watch because Chinese users less worried about privacy. If there's a way to profit, they have more room to maneuver without upsetting users.
Social network advertising around the world is designed to target consumers more accurately than portals and search engines. Targeted social advertising requires data mining and user-behavior analyses. The world's largest network Facebook reported more than US$ 3 billion in ad revenues last year and could rake in US$ 5 billion in 2012.

Sina Weibo's long-range plan calls for building a "social mapping plus interest mapping" platform. The idea is to offer users a two-way communications system like Facebook or a hybrid "Twitter-Facebook" platform.

It's unclear whether this goal can be reached – or make money.

The authors of a recent Sina financial report admitted, "We have no way of ensuring that the profit models employed by other microblogging services and social networking service providers are suitable to weibo."
......On the plus side, mobile microblogging already generates more traffic than the standard Internet, and weibos are the most active mobile applications in China, putting Sina Weibo in a good position for future growth in mobile markets.
As an investor, valuation is key. Facebook doesn't simply have to be profitable, it needs to earn enough to justify its $50 billion valuation. The real story of the Facebook IPO is that the IPO price is far closer to the company's value than the IPOs of the 1990s and at this point, investors would be wise to buy the small, profitable, and just as rapidly growing social network/social gaming firms.

No comments:

Post a Comment