Facebook Valuation To Reach $200 Billion By 2015; Wedbush Securities Managing Director Breaks Down Their Revenue Streams In This Exclusive Interview
April 11, 2011 - The Wall Street Transcript has just published Internet Services Report offering a timely review of the Internet Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Lou Kerner is a Managing Director of the private shares group at Wedbush Securities, where some of his responsibilities include coverage of social media companies. For the previous 10 years, Mr. Kerner was a serial entrepreneur with previous ventures that include Bolt Media Inc., one of the original social networks, which grew to more than 20 million monthly unique visitors in its suite of youth-focused Web sites, and The .tv Corporation International, which licensed the top-level domain .tv from the tiny island nation of Tuvalu. Mr. Kerner spent the first seven years of his career on Wall Street as an Equity Analyst following media companies at Merrill Lynch & Co., Inc., and Goldman Sachs.
TWST: What's your broad-brush outlook for the space?
Mr. Kerner: We are very positive broadly on the space, like we would be if we were transported back to 1996 with the first Internet. We think that things are moving more rapidly than ever before, Facebook being the poster child for this new pace of innovation. Other companies like Google (GOOG) need to pick it up to keep pace. We think that's why Eric Schmidt stepped down at Google, to enable a faster pace of decision making.
TWST: You've been quoted, as people ask you how much you think Facebook is worth. How do you place a value on it?
Mr. Kerner: We take a very macro view when valuing Facebook, focusing on the Internet advertising market, which is well defined. Looking out to 2015, where we project the global Internet advertising will be $105 billion, we project Facebook will capture 15% of that market. We actually think that may prove conservative given Facebook's 20%-plus share of total Internet page views today. That yields $15.5 billion in ad revenue. Other revenue - most notably Facebook Credits, from the sale of virtual goods - provides about 30% of revenue today, and we assume that percentage stays constant. That gets us to $22 billion in revenue in 2015. We estimate that margins are about 50% today, and we conservatively assume they'll remain constant. Put a 20-times multiple on that, less than half our anticipated growth rate in 2015, and you can get to a $200 billion-plus value pretty quickly.
TWST: What are some of the other companies you cover other than the ones that everybody has heard of?
Mr. Kerner: There's a laundry list of rapidly growing companies that few people outside of social media have heard of that we're spending our time getting to know. You can pick almost any vertical. You can pick recruiting. LinkedIn is obviously very social, but there is a company on Facebook called BranchOut that we think could be the LinkedIn of the second Internet. There is a shoe and accessory company called ShoeDazzle that we think is the Zappos of the second Internet. There is an enterprise software company called Jive Software that we think is the Windows of the second Internet, or the Google Docs. Every vertical has a second Internet company poised to disrupt the status quo. We think The Huffington Post is going to be the largest Internet news organization in the country because they get social; it's in their DNA. We can go on and on and on.
TWST: Generally speaking, how do companies differentiate themselves to be the "such and such" of the second Internet?
Mr. Kerner: We used to live in an offline world, and companies dominated verticals in the offline world. Wal-Mart (WMT) dominated the offline retail world. Then the Internet came along and almost none of the companies that dominated a vertical offline came to dominate that vertical online in the first Internet. That's because there's a competency in running a Web site. Just because you slap a ".com" at the end of Wal-Mart didn't make it an Internet company. The Internet was not in Wal-Mart's DNA, the Internet did not get management focus, they didn't take the risks online necessary to learn and iterate rapidly. That's why we got Amazon (AMZN). Success in the first Internet took a different set of competencies than success offline. We think that the competencies to succeed in the second Internet, in the social Internet, are almost as different from the competencies of the first Internet as the first Internet was from offline.
TWST: Where are you pointing investors now? What are your favorite stories?
Mr. Kerner: Among the larger well-known actively traded names we continue to be bullish on Facebook, but we think that there's probably more upside in Twitter now. But we believe there is even greater upside in the dozens of other, lesser-known names that are positioning themselves to disrupt incumbent fist Internet companies. The problem at this point is that the market is not very liquid for those names, but that's the same problem that Milken had with the junk bond market in the early days. I think we're still in the top half of the first inning, and that there are win-win opportunities for companies, for investors, for employees and for VCs to facilitate the growth of the private marketplace and create a more liquid environment. Things don't happen overnight. And so we're working closely with the other players in the marketplace. In particular the charge is being lead by SecondMarket. They are doing an amazing job of educating the marketplace and putting the appropriate systems in place to enable this market to scale. So we're working very closely with them and really trying to facilitate the great work that they are doing.
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