That means it is already making a margin of around 32% – an extremely healthy number indeed. Its PE ratio
is still 100, as I predicted (another lucky guess), but such a high net margin means four things:
1. It has a business model, and a strong, sustainable and profitable one at that. That means it has thrown off the traditional stigma of a start-up or a dotcom which implies little or no profits and a mad dash for market share. Just like Amazon and Google before it, Facebook is now a serious commercial proposition, and not just a flash in the pan.
2. It is already throwing off cash, which it can plow back into making yet more revenue and snapping up yet more users. Normally a business like Facebook would still be burning cash (see point 1), instead it is swimming in it.
3. Given that web businesses can reap huge benefits from economies of scale, Facebook's costs are unlikely to rise at the same pace as its revenues. As with Google, Facebook is likely to become more and more profitable the bigger it grows.
4. If its user growth continues it will soon be making $1 billion in profit a year, which means a PE of 50 rather than 100. Extend that timeline out to 2020 and Facebook could be as big as Google, and making the same kind of profits (Google made $6.5 billion in 2009 and looks set to make close to $8 billion for 2010).
Still, all four points above rely on Facebook continuing to grow and prosper – an assumption that is far from guaranteed. MySpace looked untouchable six years ago, and now NewsCorp is busy laying off half its staff
Would I invest in Facebook? If I had the spare cash, yes. But by "the spare cash" I mean if I had at least R1 million to make a long bet. I wouldn't put my pension into Facebook. Of course all that assumes that I (or any private investor) could even get near the stock. Right now you need very deep pockets and connections to get hold of even one share in Facebook, which isn't publicly traded. And you probably need to pay 5% or 10% over the odds on $1 million dollars worth to even be taken seriously.
Still, I can always dream.
P.S. I learned some hard lessons about fact checking this week. Firstly, double check definitions of financial terms before you use them (revenue does not equal earnings, silly fellow), and secondly assume that all corporate structures are more complex than they appear. Who would have known that DST is actually two separate entities, one of which Naspers is not remotely connected to? I should have, that's for sure.