Can Facebook Be More Valuable Than Google?

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Facebook‘s (NASDAQ:FB) current market valuation of $250 billion is roughly 60% of Google’s $400 billion. However, the revenue and net income figures of these companies tell a different story.  Facebook’s revenues stood at $ 12 billion in 2014, compared to $66 billion for Google. Facebook’s net income for the same period was $3 billion while Google made $ 14 billion.  So with revenues and net income around 1/5th of that of Google, how does Facebook get a market valuation which is more than half that of Google? Clearly, the market is assigning a higher valuation multiple which can be tied to higher growth expectations for Facebook.   In the next few years, several scenarios can play out and Facebook’s net income could exceed Google’s.

See our complete analysis for Facebook

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In a bullish scenario, Facebook’s net income could be very close to Google’s

We currently project Facebook’s revenue and net income to grow to $66 billion and $ 29 billion by 2022. We expect Facebook’s active monthly users (outside of the U.S. and Canada) to increase from the current figure of 1.2 billion to 1.85 billion by the end of the forecast period.  However, there is room for additional upside and the users could increase to 2.5 billion at the end of forecast period, impacting revenues and net income.

Facebook’s revenues could increase to as high as $ 90 billion if its monthly active users (outside of U.S. and Canada) increase to 2.5 billion and Instagram and Whatsapp increase their user base to 1 billion and 2 billion. This would also increase its net income to $ 40 billion at the end of the forecast period, thus impacting Facebook’s valuation significantly.

Increasing competition threatens Google’s market share

We estimate Google to generate $155 billion and $41 billion in revenues and net income, respectively, by the end of our forecast period. However, Google’s revenues could fall to $130 billion at the end of the forecast period if its PC search and mobile search market shares falls from the projected 60% to 50% and 89% to 75 %, respectively, and You Tube’s user base remains flat over the forecast period. This downside is plausible in view of the increasing competition in the online advertising market.   In this scenario its projected net income could fall to $ 35 billion at the end of the forecast period.

Facebook is benefitting from the current trend in global advertising industry. Social media ad spending is expected to outpace the overall Internet ad market, and grow at around 18% CAGR during 2014–2019. (Read Trends in Global Advertising Industry: Winners and Losers – Part 1). Facebook’s revenues can increase exponentially over the next few years and Google faces tough competition.  Though indirectly, Facebook is definitely a serious threat to Google.

 

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