Facebook Will Probably Be More Profitable Than Amazon This Year

In the first six months of 2011 Facebook had $1.6 billion in revenue and about $800 million in operating income, says a source I trust a lot. That revenue number has been reported before. And the 50% profit margin is in line with last year’s $2 billion in revenue and $1 billion in operating income.

With Facebook growing revenue and profit by more than 50% every six months, it won’t be surprising if they hit something close to $2 billion in operating income for the year.

To put that in perspective, realize this – Facebook will likely be more profitable than Amazon this year. On a quarterly basis they’re already there. Amazon had $191 million operating income in Q2 and $322 million in Q1 (financials here). That’s $513 million v. Facebook’s $800 million for the first half of the year.

Amazon’s Q3 financials are coming out this week, and Citi analyst Mark Mahaney says to look for around $298 million in operating income from Amazon for the quarter. Q4 is obviously Amazon’s big sales period – operating income for Q4 is usually almost double what Q3 is.

Mahaney also notes that Amazon’s Q4 may not look as rosy as usual due to the launch of the Kindle Fire. Says Mahaney, “There is the distinct possibility that an aggressive/successful Fire launch could materially negatively impact AMZN’s margins and EPS near-term.”

The Kindle Fire is irrelevant though – Facebook will likely be more profitable than Amazon for the year even if the Kindle Fire doesn’t negatively impact Amazon’s Q4.

Does that mean Facebook is still undervalued at $70ish billion, despite the fact that recent secondary market sales are stalling? Amazon’s market cap is currently around $107 billion.

Of course Amazon has far more revenue than Facebook, nearly $10 billion per quarter, and Q4 will be much higher than $10 billion. Last year they had $34 billion in revenue.

They just have terrible margins compared to Facebook because they sell (and deliver) actual stuff. Facebook delivers ad impressions and Facebook credits to buy stuff on Zynga.

And about Zynga. The company is still completely dependent on Facebook – “We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future,” says the Zynga S-1 For the first six month of this year Zynga reports $522 million in revenue.

That doesn’t include Facebook’s cut, which is taken before Zynga recognizes the revenue – “Facebook remits to us an amount equal to 70% of the face value of Facebook Credits purchased by our players for use in our games. We record bookings and recognize revenue net of amounts retained by Facebook.”

That means Zynga sent Facebook some $250 million in the first half of the year, or about 16% of the total Facebook revenue for that period. So Zynga is a very important source of revenue for Facebook, and probably will be for quite some time.

So is Facebook undervalued? Based on a comparison to Amazon today, and taking into account that the big growth years for Facebook are just getting started, that answer is yes.

Sounds like we should be buying Facebook stock and adding it to our list of portfolio companies, stat.

31 thoughts on “Facebook Will Probably Be More Profitable Than Amazon This Year

  1. Isn’t Zynga building their own games platform?

  2. Arsenal says:

    For me I am amazed at how Facebook adapt to changes

  3. Eytan Levit says:

    Facebook has guts, and as an Entrepreneur I can only learn from them.

    For example, changing the email notification settings – what a gutsy, balanced and amazing move.

    Initially, it seemed that it would reduce the frequency that people visit Facebook, but eventually I think it had done quite the opposite.

    Now, instead of checking my email, I also check Facebook to see if there are any new comments on stuff I write.

    I think it actually increased their traffic, and reduced their dependency on Gmail.

  4. khadim says:

    Are we going to see boost in secondary market purchase to add fb logo in portfolio :)
    Referring to: http://uncrunched.com/2011/10/19/vcs-secondary-markets-and-how-everyone-is-a-facebook-investor/

  5. zainal kl says:

    Admin services fb2

  6. Nice of you to come out with this article just when we were hearing that Facebook shares were not selling in the secondary market. So are you trying to push facebook shares?

  7. Rattapp1 says:

    Facebook UNDERvalued? No.

    Because it is “valued” at over a hundred billion Dollars already. That’s far mor, than a income of 1 billon would “allow”.
    Plus: Amazon and many other companies actually own something. Facebook hardly does. Compare Facebook-value to their passiva – and compare Amazon’s warehouse to what you call their value.

  8. The Facebook revenue model will eventually outstrip Amazon as AMZN is not a social business. Down the line Facebook will intergrate even more features that will form part of out “everyday habits”. My thoughts…Facebook is a lifestyle platform.

  9. epr212 says:

    This assumes that AMZN itself is not overvalued, which it most likely is.

  10. Steven Sarmiento says:

    Love that last line haha as for Facebook, I’m really interested to see what happens when actually file for an IPO, and what estimated value they’ll be given

  11. PM says:

    Can I ask a naive question?

    I am on SecondMarket, and trying to purchase $50k-$100k of stock, but have not been approached. I can’t actually figure out how to buy it. Is it because I’m just too small? I’m very bullish on FB long-term, and interested in buying pre-IPO, even if the valuation is > $75B. Appreciate any tips (and sorry for listing myself anonymous).

  12. Jack says:

    Amazon and Facebook are 2 totally different companies. Amazon is an eTailer primarily. It has a significantly different profile than Facebook which generates revenue from advertising. IT is like saying that Exxon Mobil is a better value than Apple. You might be able to make the argument, but in the end, you are comparing an apple (no pun) to an orange. Both industries have different PEs based on the growth prospects of the industry and profitability. This blog is a really amateurish attempt to do a financial analysis on facebook and really quite inappropriate in this blog.

    • Random Logic says:

      Arrington didn’t say they’re the same company. You’re missing the point. He’s merely using Amazon as a prominent example to show how quickly Facebook is amassing profit and surpassing industry giants, as to support his position that Facebook is undervalued.

  13. Guess(t) Again says:

    Gahd, this reads like something from Techcrunch. . .comparing Apples to Oranges (no pun intended) and creating an argument that doesn’t exist in reality. . .

    Believing Facebook is immune from the cycles of all those who’ve preceded it (remember when Compuserve, AOL, Yahoo or MySpace were indispensable King-of-the-Hills with massive market-share compared to the Whole???). . .

    Plus, even at $2Billion/Annual, I wouldn’t give it more than a 10x valuation.

    If anyone believes that Facebook will have any significance in 10-years they are ignoring history. Invest away…provided you think you can dump the stock for a profit within 2 years. It’s possible, but highly risky.

    Might be better to put that money into actual start-ups?

  14. kid mercury says:

    i wanted to echo the previous comment noting that AMZN itself is overvalued, which i tend to agree with in light of its P/E ratio in excess of 100. fb will likely go higher IMHO as i suspect the global sovereign debt crisis will ultimately send money out of debt markets and into equity, though companies with high market caps and dividends (i.e. INTC, MSFT in the tech sector) will be the primary beneficiaries of this IMHO, as well as gold mining shares.

  15. Georgie says:

    I’m not surprised at high FB profits, FB ads click prices are are going up and up. The targeting and reach is immense.

  16. Anon says:

    yeah right propaganda don’t believe this bullshit!

  17. Yup. The two typos are very off-putting.

  18. Random Logic says:

    Which company is more likely to not suffer competition in the next 10 years; which company is more likely to deepen its ecosystem?

    1. Facebook
    2. Amazon

    Amazon. That’s not to say Facebook isn’t a good bet. I won’t be surprised once Facebook is a $200 billion-dollar company. However, I wouldn’t trust Facebook being the “necessary utility” they want it to be 5 years from now, let alone 10. It’s much riskier.

  19. not sure i agree that facebook is just getting started on growth. sure they will implement more ways to monetize, but you haven’t accounted for the facebook fatigue syndrome

  20. I’m very curious: With Facebook having such a large percent of online users already, from where do people expect Facebook’s growth to come?

  21. Mark says:

    A reasonable high-end, fair value for Amazon would be something on the order of 30x next-year’s earnings, which would be about $100/share. And that’s absolutely a high-end number given that it’s forward looking and a multiple in excess of the expected 5-year EPS growth looking ahead.

    That number is 40% of AMZN’s current share price and would put the market cap below $45 billion. Are you still going “all in” on Facebook based on this comparison now?

    What if Amazon trades at only 20x next year’s earnings when they arrive and sits at $35 billion next December?

    I love Amazon, but the valuation is beyond absurd. If one is trading the stock, fine. But if one is looking long term, I’d direct you to the Microsoft chart for an example of how long your money can remain dead after the stock sits overvalued for long enough. Or to the Netflix chart for how quickly an excellent company that’s overvalued can come back to earth on a series of missteps — combined with the valuation correcting accordingly.

    Gravity sucks.

  22. Jonathan says:

    Amazon has a 100 pe ratio. It’s blatantly absurd. Any investor that goes within a hundred miles of it at that price is asking to take a Netflix-like hacking.

    Facebook shouldn’t be valued at an 85 pe ratio just because Amazon has a 100. It’s irrational and will deflate.

  23. Amanda Lim says:

    I am not surprised considering FB usage is beating TV usage – http://www.emarketer.com/Article.aspx?R=1008657 – it has with more eyeballs on it than prime time TV.

    The age of traditional media is giving way to the rise of social media. I believe the future of advertising is social and what better social medium to advertise on than Facebook? Even Google is afraid and knows her display ads revenue are threaten by this new frontier of advertising – hence, Google+.

  24. Given that Amazon’s revenue came in significantly under than expected (70 % decline) and a predicted loss in Q4, the chances of Facebook exceeding Amazon’s profits are highly likely, if not already a reality.

  25. Except for Facebook’s flagship social networking product, rest of its efforts haven’t paid off at all. If Facebook derives something like $500 million from Zynga alone, then that is really a cause of worry. Just like men spend time on pornography, women spend time on Zynga. Nothing more nothing less. Zynga is addictive, useless and stupid. Games for women was not a chartered territory and Zynga’s founders were smart enough to capitalize on that. As far as I am concerned, Zynga simply has the first mover advantage. There are already signs that users are spending lesser time in Zynga. As to the ads business, it is still not very clear if Facebook’s ad network is better. AdWords came out with flying colors only because it was significantly better than Omniture in terms of ROI for advertisers. For Facebook to eat into Google’s lunch, it would have to provide a significantly better ROI for advertisers. Any prudent investor would think twice before betting that Facebook can beat Google in the advertising game.

    Read my full take on this – http://arnamath.posterous.com/half-baked-at-uncrunched

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