The $245 Billion Experiment
I have to admit to being a bit startled to see Facebook supplant Walmart as the 10th-most valuable company in the S&P 500 Index last week. With a total stock market capitalization of $245 billion, Facebook overtook Walmart, whose value has slumped to $235 billion after its stock lost 15% of its value so far this year.
Unlike the other tech sector giants ahead of it on the top ten list, Facebook is a relatively young company, founded in 2004. Believe it or not, Apple, the most valuable company, originated 39 years ago. Microsoft came into being 40 years ago; and even nerdy Google was incorporated in 1998. But Facebook isn’t even a teenager, yet it is already moving in on the big boys.
In addition to the three tech behemoths listed above, the only other companies valued higher than Facebook are such venerable names as JPMorgan Chase, General Electric, Johnson & Johnson, Wells Fargo, Berkshire Hathaway, and Exxon Mobil. Something about that just doesn’t seem right, like seeing a picture of your kid brother on the cover of Sports Illustrated alongside the NBA “dream team.”
What’s even more surprising are some of the companies now valued at less than Facebook, such as IBM ($166B), AT&T ($186B) and current Personal Finance Income Portfolio holding Verizon Communications ($194B). At one time (and not that long ago, at that) these “blue chip” stocks would have scoffed at the suggestion of one day being worth less than a business that basically allows people to socialize in cyberspace. But that’s exactly what’s happened.
In a certain sense this feels like some sort of giant experiment in economic rationality, in that Facebook has a pretty unusual business model. It does not make anything that you can touch or see. While you may have an Apple iPhone in your pocket and filled your car with gas at an Exxon station on your way to work this morning, your interactions with Facebook occur solely in the ether.
The other somewhat unique aspect of Facebook is that it does not cost you anything to use it. That smart phone in your pocket may have set you back a few hundred dollars (or more), and you could easily spend $1,000 a year on gasoline, but Facebook charges you nothing to use its service. In the narrowest sense it’s a company that doesn’t make anything, and you don’t pay them anything for it.
However, from a broader perspective it can be argued that Facebook is a company that enables almost everything, and gets paid (indirectly) by almost everybody. Long removed from its origins as a website to check out pictures of fellow college students, it now provides a forum to facilitate a wide variety of human interaction.
All of those interactions further define each user as a person, which in turn informs advertisers what type of car you are likely to buy, which style clothes you prefer to wear, and where you want to go on your next vacation. In short, it allows everyone in the world with something to sell to figure out exactly who should see their advertisements.
In that regard Facebook may be worth every penny of $245 billion, especially now that its user base is expanding to all corners of the globe. The number of its MAU, or “monthly active users”, is rapidly approaching 1.5 billion people, more than one out of every five human beings on the planet! With the possible exception of Coca-Cola, whose Coke and Diet Coke products account for 41% of global soft drink consumption, there may not be another company in the world with as many regular users.
All of that said, I do not recommend Facebook in any of the Investing Daily portfolios I manage (including Smart Tech Investor, which only covers the tech sector). While I am fascinated by the company, I cannot bring myself to believe that its revenue stream is unassailable. Just as Facebook supplanted Myspace as the social networking site of choice, I wonder what will happen to its share price when something else comes along that offers a more attractive value proposition to its advertisers.
All of which begs the question, who or what might find a way to replace Facebook as the advertising medium of choice? My guess is that it will not be another social networking app, but someone higher up the food chain. Recently, Verizon sold $15 billion in legacy hardware assets so it could pay down debt, and acquire AOL. In its press release after the deal was consummated, AOL CEO Tim Armstrong said, “AOL and Verizon’s combined assets create an ability for us to blaze a new trail in a newly mobile and connected world.”
That’s a fairly vague statement, but viewed through the prism of a potential rival to Facebook for advertising dollars it suggests that Verizon may attempt to capture internet users at the point of connection via AOL’s “One” advertising platform. If so, the ensuing battle for market share could drive down Facebook’s value considerably as Verizon fully leverages its FiOS network penetration. If not, then Facebook may have a clear path to moving further up the list in fairly short order.