BREAKINGVIEWS - Facebook puts Web 2.0 rivals in appropriate light

Thu Sep 8, 2011 1:32pm IST

Facebook CEO Mark Zuckerberg speaks during a news conference at Facebook's headquarters in Palo Alto, California July 6, 2011. REUTERS/Norbert von der Groeben/Files

Facebook CEO Mark Zuckerberg speaks during a news conference at Facebook's headquarters in Palo Alto, California July 6, 2011.

Credit: Reuters/Norbert von der Groeben/Files

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Robert Cyran

NEW YORK (Reuters Breakingviews) - The latest numbers on Facebook puts the social network's Web 2.0 rivals in the appropriate light. Initial public offerings this year for tech companies like content factory Demand Media and Internet radio service Pandora Media have shown how profitless growth can gain favor. But Facebook's fast-growing profit is a stark reminder of exactly what's missing from Silicon Valley.

Adoration of the top line can be fickle. Just look at the nearly two-thirds drop in the value of Demand Media's stock following the first-day pop. Or consider Groupon's recent decision to delay its share sale. At Facebook, sales nearly doubled in the first half of the year to $1.2 billion. That alone would be enough to get revenue chasers excited. But the firm also racked up around $500 million in net income.

Information about Facebook is patchy because the firm is private, so only so much can be gleaned from the figures. But revenue growth appears to be slowing slightly. That's understandable given its size. Further, even though Facebook keeps adding to its base of over 750 million users, it will become increasingly difficult for it to find folks without an account. But that doesn't mean there aren't still golden years ahead.

People are sending more messages. Partners, such as video game company Zynga, are giving Facebook a bigger slice of their revenue. New advertising partners are also being signed up. But it's the gallons of black ink writing Facebook's investment story.

Rivals and underwriters can try and convince investors to focus on various proxies for profit and ignore the real thing. In the meantime, Facebook's margins are holding steady at around 30 percent. It's easy to measure anything from eyeballs to sales -- and just as easy to overpay for them. But as Facebook is showing, nothing can ever replace a healthy bottom line.

CONTEXT NEWS

-- Facebook's revenue nearly doubled in the first half of 2011 to $1.6 billion, a source familiar with the situation told Reuters, and net income was almost $500 million.

-- The social networking company had sales of $1.2 billion and net income of $355 million in the first nine months of 2010, according to documents provided to clients in connection with a share offering earlier this year.

-- Reuters story: EXCLUSIVE-Facebook doubles first-half revenue-source

(Editing by Jeffrey Goldfarb and Martin Langfield)

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