Facebook, overhyped social media giant or undervalued media titan? Margins and growth rates tell the story. Time too gives us perspective.
Check out the margins:
85% gross margin
45% op income margin
50% growth rate
Google 65% gross, 25% op;
Tencent 65% gross, 35% op
and; Ali Baba 65% gross, 35% op.
It is consistent across Facebook and Google that they have overhead cost at about ~40% of total revenue, and ~30% across Tencent and Ali Baba. Nothing concrete here but I will go with the hunch that this overhead % reflect more about the operating environment each group of companies are in.
It is the COGS of 15% for FB vs 35% for the rest that really caught my eye. Standard COGS for these companies include server costs and traffic acquisition cost. Basically, this refers to any cost involved in directing traffic to Facebook. Most of the cost here are standard components and it is the traffic acquisition cost that makes Facebook really interesting.
Unlike Google that had to pay a lot of money to acquire traffic through its various ad networks, Facebook has not need to do so, not yet at least though the management had plans to enter into the space.
With its rapid growth rate and high margins as compared to Google's plus a bottom line is almost at Google's level, investors must ask why. What is it that gives Facebook such high levels of profit efficiency?
My take is the way both companies acquire traffic. Facebook is a closed social media ecosystem that draws people directly onto it. Hence it does not have to pay for traffic. On the other hand, Google is a sprawling web giant that has to cast out its web bigger and bigger each day in order to sustain its grip on the internet. With Google's open ecosystem approach, I will put my money on it being the bigger cousin eventually. However I'd like to think that Facebook will be the much more profitable company given its hopefully self sustaining closed ecosystem.
It's even more remarkable if you consoder the fact that unlike Google, Facebook has yet to come under any major antitrust cases.
So yeah, that's why I think Facebook is undervalued
Update: I saw an advert by MCCYS with a remarkable level of engagement and intimacy created through the personalised contents and comments. This reinforced my conviction that Facebook is undervalued.