Let me preface this post by saying that Yahoo was and is an incredible company. Last year it generated $6b+ in revenue and a billion in profits. However, Yahoo is no longer a growth company and its revenues are now declining. This has led it to have a current market capitilaztion of $22 billion, or less than 1/3rd of what Facebook shares are going for in the secondary markets.
Every day Facebook reminds me more and more of Yahoo, circa the late 90’s. For those who weren’t around, Yahoo was the dominant web brand. As it continued to add users to its ever growing list of popular services (my.yahoo, mail, instant messenger, groups), it’s valuation began to climb exponentially. After all, how could a company that a large percentage of every internet users visited their site every single day not be insanely valuable?
Ten years later, that question has been answered. Fundamentally, nothing with Yahoo has changed. They are still an extremely large site reaching hundreds of millions of users worldwide, every day. They still have a dominant position in the coveted finance arena and are one of the most recognized Internet brands in the world. However what they have never been able to do is convert that name recognition and number of users into vast sums of revenues and profits.
Facebook appears to be following a similar path. Rumors of Facebook’s 2011 projections put 2011 revenue at ~$5 billion and profits at ~$1 billion. Facebook appears to be generating very Yahoo like numbers off what is likely to be a similar or even larger number of users. The concern for investors at current valuation needs to be where does the additional revenue growth per user come from? To justify current valuations, Facebook will likely need to generate ~$15 billion in revenue, a 3x increase from 2011 projection. User growth alone can probably handle a few billion of this, but Facebook still needs to double their revenue per user to get to $15 billion. Something that will likely not be achievable with display advertising alone.
A further concern is that as more of Facebook’s growth shifts to the less developed world, the revenue generated by each incremental user will decline. Now I’m sure that Facebook has many plans for additional revenue per user, and initial ones such as Facebook Credits have already been rolled out. But Yahoo had many plans for incremental revenue as well and by all accounts display advertising still accounts for the vast majority of Facebook’s revenue.
As with Yahoo, even if Facebook follows the exact same path they are an incredibly valuable and successful company likely to generate billions of profits for their investors and many of their employees. It is only the most recent of investors that need to hope that Facebook is able to mimic Google in breaking out of display advertising prison, otherwise they may find themselves with the second incarnation of Yahoo.