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Global Tech

The Facebook Paradox: Both Overvalued and Undervalued

A Rorschach test: good or evil? Mark Zuckerberg at Techonomy 2016, where he made infamous comments about fake news and the U.S. election. (Photo: Paul Sakuma)

Facebook has a market capitalization of $375 billion dollars for a reason. Despite all the unwanted but often warranted critical headlines, it was no easy feat taking this company from a dorm room to a platform capturing 30% of the global population. It’s easy to be critical from the outside. I am guilty of that recently when I worked as a Wall Street analyst, weighing in regularly with feedback about how companies should do this and that. But now I’m a start-up co-founder, helping run a New York-based beauty-booking marketplace called Snailz. I’ve found executing on even small changes there can feel like steering a giant and unwieldy ship. Imagine what it’s like for Facebook.

There are two sides to every coin and two sides to Facebook. If we don’t admit that we’re not being fair. The first argument – which suggests Facebook is overvalued – is that the company is simply too big and wields too much power. The flip side, however, is much more complicated. By that logic Facebook is still undervalued.

So here are the two arguments – one from standpoint of an analyst (my former profession), the other from the standpoint of a business owner (my current profession).

Why Facebook is Overvalued 

The case for an overvalued Facebook is less about financial fundamentals and more about DNA. First and foremost, the company has lost sight of who its actual customer is. It’s not the user who volunteered the wealth of data in the first place. Rather, it is the third-parties, brands, and advertisers to which Facebook has the “fiduciary” duty.

Perhaps this is best explained by understanding what Facebook is. It is not a platform to make the world more open and connected. That’s simply a means to an end. Facebook is a data company. Period. The customer is not the user of the products and services. The real customer is the user of that data.

In that context, it’s no wonder Facebook lost its way regarding where it places the onus of its attention and resources, whether that’s protecting privacy, supplying more tools to manage personal information, or being self-aware of their influence. Transparency into the company’s algorithms is also almost non-existent. Incentives are all that matter and the incentives have never truly been with the user.

In a nutshell, credo is one thing. Actions, however, speak louder than words.

The debate in Washington, Brussels, and elsewhere among legislators and regulators is often more about grandstanding than truly understanding the technical aspects of the business, but it rightly exposes serious questions about the business model. How do these algorithms work? What does the company really know about each user? What does it track without explicit consent? Without this kind of questioning, regulatory changes may come too late.

Last, the overvalued argument can be made literally on valuation. Should Facebook have a price-to-sales multiple 2.5x greater that of Amazon and Apple? Maybe, given its current net profit margin profile, nearly 20 percentage points higher than Apple. But there is good reason to think that the margin has peaked, costs of managing the platform are rising, and its products are starting to cannibalize each other. But this argument is a cop out.

The real risk is about how far regulators may go. Facebook’s value is a function of its four intertwined products and its ability to collect and share data freely across the portfolio ―Facebook, Instagram, Messenger, and WhatsApp.  If you’re not using one, you’re probably using another.  (That’s why the total unique user base of the company’s products now exceeds 2.5 billion, a number you have to keep repeating just to believe it.) If regulators forced a Facebook breakup by product, and separated the flow of information between those assets because they began operating as silos, the utility of the data falls precipitously.

Facebook is overvalued unless you assume that the assets will always be together. If not, it’s a whole different story.

Why Facebook is Undervalued

Perhaps the most undervalued asset in the world today is consumer data as captured by digital platforms. How do you quantify what data on a user is worth? Public markets set prices based on expectations about a company’s revenues, profit, and asset utilization. But no market has ever had to value data before, at least on this scale.

Facebook and its dopamine-hit-driven engagement generates data on over 2 billion people. That data about where users spend about an hour each day is worth something. To be sure, it is indirectly valued, given that a multiple is placed on the monetization of that data. However, having that continuous stream should perhaps be looked at akin to cash flow. It’s something to consider, surely.

As an operator, my own company Snailz wouldn’t be where it is without Facebook. It lets us target our ads with astonishing precision, to for example reach women aged 20 to 35, and further target them based on their interests and location. No other platform allows me to spend precious marketing dollars so efficiently, and also enables me to quantify an ad’s performance in real-time.

For all you Facebook haters, it’s really important to consider its role in society and to realize that another platform could emerge to take its place. Businesses like mine rely on it because of its ubiquity. We are competing in the very crowded beauty space. Cutting through the noise on a tight budget wouldn’t be possible without Instagram. Without scaled alternatives, many businesses wouldn’t survive and many consumer start-ups couldn’t get off the ground. My company needs Facebook and is unlikely to go elsewhere. That’s the bottom line.

The optimist in me believes in Facebook and its ability to once again find its way. It’s one of the most important companies in recent history and deserves to be mentioned alongside the best of the best. Whether the necessary changes are internally driven or whether they’re forced by regulators, this company can find a way.

For the sake of my business – and for society – I’m rooting for Facebook.

James Cakmak was until recently a Wall Street security analyst for over 10 years covering the Internet sector. He is also co-founder of Snailz, a digital beauty booking marketplace operating in New York. Follow him on Twitter: @JamesCakmak

Ryan Guttridge, Adjunct Professor at Smith School of Business, University of Maryland, contributed to this article.

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