I moderated a panel this morning with a few major-league Internet-industry gurus on it.
The topic of Facebook came up.
All three of the gurus–Howard Morgan of First Round Capital, Eric Hippeau of Lerer Ventures, and David Tisch of TechStars–were long-term Facebook bulls.
One of the gurus, Howard Morgan, went so far as to say he was buying Facebook stock in the high $20s a couple weeks back, when everyone was disgusted with it. (Now it’s trading at $31 and change).
And why are these gurus so bullish?
Two specific points came out:
- “Sponsored stories.” Eric Hippeau thinks the ad unit Facebook launched a few months ago, “sponsored stories,” is going to be an absolute blockbuster. This ad, you will recall, is inserted into Facebook users’ news feeds, where the users are then free to pass it around to their friends. Hippeau thinks that, after blowing it a few times (with “Beacon,” for example), Facebook has finally gotten the “social advertising” thing right. And he thinks “sponsored stories” will blow the doors off.
- “Future profit margin leverage.” Howard Morgan, the guru who has been buying Facebook stock, thinks that everyone’s missing the amazing future profitability of Facebook’s business model. At Facebook, remember, the users and advertisers create all the content. Facebook just makes the platform. There are big fixed costs in developing the platform–a software developer costs the same whether you have 1 user or 1 billion users. Howard thinks, therefore, that the profitability of Facebook’s next $4 billion of revenue will be much higher than the profitability of Facebook’s existing $4 billion (which is already extraordinary).
So, are Eric and Howard right? Is Facebook a screaming long-term buy here?
Eric and Howard both make compelling points. And there are certainly some short-term reasons to buy Facebook stock.
But here are some points to the contrary.
- First, a lot of Facebook’s other ad units sounded very compelling at the beginning and have turned out to be kind of meh. So the jury’s still out on how big a blockbuster sponsored stories will be.
- Second, although the initial feedback on Facebook’s mobile ads has been good, it seems likely that mobile will be a lower-margin platform for Facebook than desktop. Also, Facebook already has one of the highest profit margins that any company has had in history–50% operating margin–so counting on this going much higher seems unwise. There will always be a lot to invest in. So the “unbelievable future margins” story also may not materialise.
- Third, as I’ve suggested before, the next 2-3 billion Facebook users will be much less valuable than the 1 billion Facebook already has. Facebook’s 1 billion users have most of the world’s money. Advertisers aren’t going to pay as much to reach the next 2-3 billion.
- Lastly, Facebook’s stock is still very expensive relative to other big tech companies’ like Apple and Google. Apple’s trading at 11X next year’s estimated earnings, and Google’s trading at 12X. Facebook, meanwhile, is trading at ~50X.
And I’ve already described in detail what another of the smartest investors I know thinks will happen to Facebook stock over the next several years. Suffice it to say, he’s not as bullish as Howard and Eric.
So, what do you think?
Are Howard and Eric visionaries? Or are they cruising for a bruising?
Weigh in below…
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