Comparing Pre-IPO Facebook To Pre-IPO Google: Fair, Or A Case Of Apples And Oranges?

Facebook, in its updated S-1 released on April 23, dazzled us with more milestone user numbers: 901 million monthly active users, and 500 million on mobile. But it also reported a “seasonal” decline in revenues — $1.058 billion compared to $1.131 billion in the quarter before — and (perhaps more importantly ) annual revenue growth slowed down: in Q1 2011-Q1 2012 it was 44.7 percent, nearly half of the 88 percent for the same period the year before.

Some new data from Privco teases out those revenue growth numbers even further by comparing Facebook’s financials to those of pre-IPO Google, in an attempt to show that it is not seasonality but more particular issues with Facebook. The picture is not pretty — and some might wonder if it’s fair.

With Facebook expected to go public in the next quarter, Privco notes that when Google was in the same position, its revenues were still on the rise — albeit at a smaller rate. Facebook’s decline of 6.4 percent, Privco notes, was reflected in both areas where the company generates revenues, advertising (down 7.5 percent) and Payments/Facebook Credits (down one percent).

Privco also notes that even when you compare revenue growth on a year-over-year basis, Facebook is also showing to have lower growth rates than Google did:

And lastly, Privco has drawn up a graphic looking at how Facebook has done directly compared to Google over the last year, and shown that here, too, Google has performed better in terms of its revenue growth:

Privco’s “irrefutable conclusion”:The seasonality excuse Facebook tries to use in its latest S-1 simply does NOT stand up to the data. Facebook’s declining growth is specific to Facebook and reflect clear organic slowdowns in its business,” the analysts write.

There seems to be some issues with this, though:

For one, the graphics above are comparing companies at different stages of maturity. Facebook is now eight years old, and Google was five when it went public. Facebook — even if it hasn’t made a song and dance about it — has been plugging away at its ad business for almost as long as it has existed — since around 2006 by some estimates.

Another point is that the advertising models behind these companies are hugely different. Privco’s CEO Sam Hamadeh points out to me that “Facebook and Google pre-IPO as businesses couldn’t be closer as comparables” — Wall Street speak for companies that have very similar size and business model characteristics. “No, the companies aren’t twins, but they are clearly as close as could be as comps,” he says. That goes also for their respective revenues: that just before its IPO, Google had about $700 million in quarterly ad revenue, while Facebook’s most recent quarter’s ad revenue was just above $800 million, he notes.

But in actual fact, Facebook has been launching a bunch of new products — Sponsored Stories, for example, only coming into play halfway through the quarter. Along that, it has also been introducing radically different ways of distributing and measuring ad effectiveness, and those changes need time to see if they will take off. On top of that, Facebook’s advertising is essentially based around display ads, while Google’s is primarily in search. For now, to paraphrase the old American saying, those twains have not really met.

Ultimately, if advertising is a game of scale, then Facebook’s user numbers and the engagement of those users will be an essential cornerstone in trying to gauge the company’s future success. Whether investors have the patience to see how that plays out is another question.

I have had a lot of back-and-forth with Sam in the last few hours about his company’s research and he also brought up some other interesting food for thought for this discussion, all of which can of course be debated more:

These numbers are not a consequence of Facebook simply moving more cautiously in its ad strategy, he argues. Google, he says, has been a more conservative ad player than Facebook: According to Privco’s research, when Google went public it was following a strict maximum of only up to two text ads per page, with no images or graphics permitted. Facebook, says Privco, went up to seven ads per page late last year, allows images, and as of February even permits videos and sound in ads. “We wouldn’t agree that Facebook is somehow moving more slowly or conservatively than was Google at similar…if anything quite the opposite.”

He also questions what Facebook will do next to grow revenue further: “Google was widely believed to have much ‘dry gunpowder’ in its back pocket for future growth,” he says, “and was still posting 100%+ year over year revenue growth.  Facebook he says has used up much of this “dry powder” over the past year to hit revenue targets, with seven ad slots per page (up from 4 a year ago), permitting paid Sponsored Stories in users news feeds, introducing larger and more intrusive ad formats in Feburary, allowing video, sound and interactivity (survey questions and the like) in its ads, selling ads on its log-out page (introduced in December). “There aren’t many places left to sell Facebook ads,” he claims.

Time spent on Facebook. Sam points out that this is going down, according to data from comScore, and “no increase in number of ad spots can make up for this fundamental fact. Unless Facebook can lure users back more often – such as by purchasing new apps like Instagram – Facebook’s usage growth, and therefore its ad revenue growth are slowing. The very fact that we’re now discussing seasonality as a factor (as if we were speaking about Harrods or Marks & Spencer) should be very concerning to investors, and to its lofty valuation.”

Projected 2012 revenue: Privco’s averaging of analyst reports puts it at $6.7 billion, but after this week’s S-1, Privco thinks it will be closer to $5.41 billion. Privco’s number is based on a 45.5 percent growth rate, “Faster than Q1 to give them some room for upside from newer ad formats making up for some usage and user growth slowdowns,” he says. The $6.5 billion figure, he notes, is based on 75 percent year-over-year growth for all four quarters this year. Given that the first quarter was only 44 percent, “The next 3 quarters would need to somehow make up for that by growing close to triple digits.”