21 February 2014
After reading about Facebook’s $19 billion purchase of WhatsApp, I started thinking about the revenue and public valuations of the giant advertising companies—Google, Facebook and Twitter—as compared to that of Apple:
Google, Facebook & Twitter are essentially advertising companies with a combined market capitalization of $612 billion. The total global advertising spend in 2012 was about $507 billion, of which $99 billion was spent on internet advertising (source). These three companies took in $69 billion in revenue in 20131. By comparison, Apple alone took in $170 billion.
Earning 60% less revenue than Apple, the stock market currently values the trio of advertisers at 30% more than Apple.
Assuming the trio of advertisers don’t discover other ways to earn money (they haven’t yet) and that the global ad spend at least remains the same, to match Apple in terms of revenue as a percentage of market capitalization, the percentage of global advertising spent on internet would have to more than double, and the trio would have to capture all of it.
Perhaps that’s why Facebook snaps up companies like Instagram and WhatsApp. If their market valuations depends on their ability to capture the bulk of a hopefully growing internet slice of global advertising, it’s in their interest to acquire large potential ad channels, while at the same time removing those with whom they might otherwise have to share the pie.
The current market is obviously very optimistic about the future of the advertisers, and very pessimistic about the future of Apple. Looking at the financial positions of these companies, and considering their business models and histories, I’m happy to be a Apple investor. I’m reminded of the (paraphrased) words of Benjamin Graham:
In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine, i.e. a company's true value will in the long run be reflected in its stock price.