Apple and Facebook

Finance at First Light
Good morning! Here are two tech topics for Tuesday, also available in audio:


  1. Is Apple In Trouble? | Steve Jobs is taking medical leave just as the company’s competition heats up.
  2. What’s Facebook Worth? | The movie is winning awards and Goldman invested $450M, but Facebook generates little revenue per visitor.



1. Is Apple In Trouble?

Apple (AAPL) co-founder and CEO Steve Jobs will take a leave of absence to focus on his health as he struggles with pancreatic cancer and the side effects of a liver transplant he received almost two years ago. Chief Operating Officer Tim Cook will take the reins in Jobs’s absence, as he did in April 2009 when Jobs underwent the transplant. Apple shares plummeted 8 percent on the Frankfurt exchange in response to the news.

Matt Egan at Fox Business reminded everybody that the 50-year-old Cook is “widely respected in the industry and as Apple’s chief operating officer has been Jobs’s trusted No. 2 for years.” However, he’s nowhere near the showman that Jobs is, and that has some analysts believing that “Apple is not as valuable a company” with Cook on top.

Eric Savitz at Forbes suggests keeping perspective on the damage in three ways. First, “Apple has been through this before and the stock has outperformed.” The last time Jobs took a medical leave, Apple shares gained 67 percent. Second, Apple’s talent bench goes a lot deeper than the estimable Cook to include “industrial designer Jonathan Ive, marketing guru Phil Schiller, iPhone software specialist Scott Forstall.” Third, nobody can really think a company generating more than $100B in revenue last year is the work of one man, no matter how great he may be.

However, James Stewart was worried about Apple’s future even before the Jobs announcement yesterday. He wrote at the Wall Street Journal on Sunday that things have gone so well for so long in Appleland that he’s “not sure what worlds are left for Apple to conquer.” He thinks “competition is stirring” and cited Motorola’s (MMI) Atrix smartphone which is compatible with a laptop dock station that turns the phone into an actual laptop computer, and Xoom tablet computer which CNET called a potentially “disruptive technology” that “can literally and figuratively measure up against the iPad.” These developments leave Stewart “nervous as an Apple investor” because it’s basically a hardware company “and hardware companies are vulnerable to competition.”


2. What’s Facebook Worth?

The Social Network, the drama about the creation of Facebook, took home four trophies from the 68th Golden Globes Sunday night. The Los Angeles Times says the “consensus is that ‘Network’ is now the movie to beat” at the Oscars on Feb. 27.

Doing just as well as the film is Facebook itself, now up to more than 500 million users. It received two weeks ago a $450M investment from Goldman Sachs (GS) and $50M from Russia’s Digital Sky Technologies. With Goldman gaining entry to the still private firm for its wealthiest clients, pressure to take Facebook public is growing. The momentum has investors trying to understand what Facebook is worth.

According to comScore, “people worldwide now spend more time on Facebook each month than they do on all of Google’s (GOOG) sites.” A $50B market cap, which is the figure most widely used in the media after The Economist said Facebook’s annual revenue is around $2B, works out to less than $100 per user. Given all the data that Facebook knows about each of its users, they’re probably worth at least that much to advertisers.

James Altucher wrote in the Wall Street Journal’s Financial Adviser blog, “Facebook will eventually be worth not $50 billion but $200 billion, rivaling Google.” He considers Facebook to be “a mini-Internet” because one in four page views in the US happens at Facebook, everybody’s “home page” is now Facebook, and eventually every company will need to maintain a corporate presence with corporate ads on Facebook. On the latter, he wrote, “Google is capturing the entire search ad market. And Facebook is slowly but surely capturing the display ad market. Facebook has a much finer level of micro-targeting than Doubleclick (owned by Google) in terms of display ads.”

Holman Jenkins, however, wrote in the Journal on Saturday that nobody has a clue what it’s worth: “Facebook, five years hence, might be as valuable as Google based on its potential to extract revenue from a membership already numbering half a billion users. [However, it might] have gone the way of the hula hoop or MySpace. … Nagging questions remain about how Facebook will spin its huge audience into advertising gold or some other kind of gold without driving its audience away.”

Yes, the spinning of that audience into gold is the whole trick, and it hasn’t happened yet. We must avoid standing glassy-eyed before large numbers that are not profit. Potential is fine, but when it comes to valuing a company the rubber has to meet the road. Sure, 500 million users is impressive — if they pay something. What if they don’t? Then Facebook becomes Skype. Similar to the way millions of people love interacting on Facebook, millions love interacting on Skype. That’s not enough to make it mouth-watering to investors, though, especially after eBay (EBAY) sold it in Nov. 2009 at a valuation of $2.8B. Why so little compared to the numbers being bandied about for Facebook? Because Skype boasts 560 million registered users…most of whom pay nothing, according to NPR. The revenue multiplier matters, and even a customer count as large as 500+ million produces an unimpressive sales result when multiplied by a per-user outlay of not-as-much-as-everybody-imagines.

Indeed, Business Insider shared JP Morgan data on eight leading internet companies to compare their revenue per user. Here’s what they found:

Some see opportunity for growth in Facebook’s low figure. Others, however, see an inherent limitation to the social networking model: nobody wants their personal information thrown in their faces with ultra-targeted ads that say things like, “Hey, Bob in Tulsa, how would you and your 55-year-old friends who like Elvis music and collecting motorcycles enjoy a 20% discount on your next visit to Fat Guy’s Burgers?” While that much text isn’t possible in the current structure of Facebook ads, many users have noted with alarm the creeping use of private life details in ad targeting.

A key difference between the ad experience on Google and the one on Facebook is that Google search users are actively seeking information, often on something to buy. They welcome ads in such a mood because the ads are part of the expedition for information. On Facebook and other social sites, people are not on a shopping or research mission but are, well, socializing. That’s probably why early advertisers on Facebook, such as eBay, are reporting tepid results and why market research has found click-through rates on Facebook ads to be less than 10 percent of the rates achieved on Google.

Then again, perhaps advertising isn’t the only idea up Facebook’s sleeve. JP Morgan analyst Imran Khan, the person behind the chart shown above, thinks Facebook stands to make more money from applications and games.

To which I say I’m from Missouri, so show me.

Have a great day!
Jason Kelly

New! Don’t miss the 10-minute podcast episode of this article.

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  1. David Ellis
    Posted January 21, 2011 at 4:17 pm | Permalink

    I also don’t click on Facebook ads. I wouldn’t want to own Apple shares now.

    I really like the Podcast, since it’s easier to find time to listen to a podcast than it is to read through a long article. Hope you continue making them!

  2. Posted January 20, 2011 at 4:12 pm | Permalink

    Perhaps Apple is somewhat overbought and is due for a pullback soon. They rose so much for the past year, I can imagine that there are many people taking profits. The only ones buying their stocks now are shoeshine boys who happen to own a Mac, iPod, iPhone and iPad.

    And Facebook? I never really liked James Altucher’s opinions. From what I’ve read of his, he seems one of those people who believes that the internet is humanity’s new home; Facebook is far from worth $200 Billion. The fact that, as you mentioned in a previous comment, nobody clicks on Facebooks ads is something worth considering.

  3. Chris - Denver CO
    Posted January 19, 2011 at 12:57 am | Permalink

    I can’t say I click on any Facebook ads.

    • Posted January 19, 2011 at 2:32 pm | Permalink

      Neither do I. Apparently, that’s the norm.

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