On Google Part 1: Search and Conquer

Google is not only a big company, but also a central player on the internet arena. It has become so effective at what it does that it has become a synonym of Search. This aren't, of course, big news. Yet, with the advances in technology and the constant fight for dominance online- both, on the PC and on mobile-, one cannot ignore Google.

The Company

How was the internet before Google? That’s a question we rarely ask ourselves since we take the search Engine giant as a given. In any case, the closest things to be had compared to search engines today were directory-like sites. The first two were WWW Virtual Library and Yahoo! There were a ton of advances toward a smoother experience, but it wasn't until Altavista and Ask Jeeves that we got a search engine. But relevant results were still elusive. Then came Google, with the deadly PageRank algorithm.

What is PageRank? Basically, it is an equation that measures the relevance of a site given not only relevant words, but also the number of references that link to a site. To put it in simple words, it measures the popularity of a site by how many referrals it has. This, of course, is just part of the equation, but the effectiveness of PageRank (named after Google’s Larry Page) made Google the Search Engine of choice.

Yet, why does Google seem to be so important to advertisers? As Ben Popper from The Verge puts it,

“Early on in its history, Google learned a valuable lesson. It wasn't just the index of all the documents on the web which was interesting. It was also the logs detailing how people searched that were valuable. The millions of people typing billions of words into Google’s search bar provided the raw material which fueled the machine learning behind Google Translate, a service which quickly outstripped its competitors.”

          - Source: The Verge

This enabled Google to have very effective, targeted ads. This, of course, is very valuable for advertisers, since it means that ads would be displayed to the people who are most likely to buy their products and/or services and avoid the people who wouldn't be interested.

Google’s Search (and most of the rest of its products) seem to be free, but they actually have a hidden cost for users: data. We use Google products for “free” in exchange of information that Google uses to perfect their business model. In a sense, that explains why the search results vary from person to person, especially when you are logged into G+ (just try it with a friend; sometimes the results would vary mildly, but sometimes they are quite noticeable). Yet, this means that our Search results would be helpful to us- it’s a matter of give and take with privacy.

Nonetheless, there are many other options to Search stuff online, being Microsoft’s Bing, Yahoo!, and Ask.com some of the most widely known. How do they measure up? ComScore, an internet company that measures what people do online, released the Search Engine rankings for May 2013, which points to how strong Google is in Search. As you can see, Google dominates the ranking with 66.7%, followed by Microsoft and Yahoo! with 17.4% and 11.9% respectively. It’s no wonder that Google became a verb.

Google Products

Google makes almost all of its revenue with its sales of ads. And by almost, I mean it: 95% of Google’s Revenue for 2012 came from advertising (page 12, Google 10-k 2012). Not surprising given that advertising is Google’s core business through the likes of AdSense and AdWords. Nevertheless, Google has a lot of different products not related to search, like Google Play or Google Docs. None of them makes a dent on the huge percentage of what ads mean in revenue to Google.

The rule in Mountain View has been, as far as 2004’s 10K Annual Report, to follow a 70-20-10 rule. 70% of Google’s efforts go towards optimizing Search and developing their advertising network- their core business. 20% is dedicated towards “adjacent areas”, such as Gmail, for example. The remaining 10%, nonetheless, is entirely focused on innovation.

What may really come as a surprise is that the percentage of revenue coming from ads is very big despite the recent acquisition of Motorola Mobility. Yet, Motorola is actually bleeding out which makes the acquisition seem like a big mistake. Yet, Tim Worstall from Forbes makes a compelling case that the price was actually much lower since the Search giant can use tax deductions accumulated by Motorola to its advantage. Nonetheless, this helps us to put Google’s size in perspective.

Google, then, supports its expansion through products and acquisitions with the cash generated by ads. The company has the most valuable property online. KPCB’s famous Mary Meeker’s Internet Trends released on May 2013 showcases on slide 6 how Google rules the internet in terms of visitors. As for the percentage of the digital advertising market, Google has 31.5% (Google’s dominance on mobile is more steep, reaching 52.4%). The question is: “What’s the purpose of Google products?”

That is certainly a valid question since many of Google products are completely unrelated to Search, from Picasa to Google driverless car (for the complete set of Google products, see this lengthy list on Wikipedia). Even Cracked.com makes fun of the fact through the following image:

Jokes aside, it certainly seems that the company has a distinct personality of its own that keeps it making new things that tilt towards the futuristic like the driverless car, but often in a way that sometimes even comes as somewhat cartoonish sounding, like Project Loon. The company embodies Silicon Valley’s spirit.

Currently, the company is divided into 7 distinct categories (The Verge). These are: Search, Chrome & Apps, Mobile, YouTube, Ads, GeoCommerce, and Social. These categories were, according to The Verge, created after Larry Page took over as CEO on 2011. The chart on that article is pretty nifty, since it lets us see how Google managed acquisitions throughout the years.

Still, what’s the point behind such a broad range of products that doesn't seem closely related to Search? What’s this about driverless cars? As an investor, current or potential, you must worry about how revenue is being spent.  

Nonetheless, there are reasons behind all this different endeavors. Steve Faktor, from IdeaFaktory, has made, quite certainly, the best analysis I've read on how the different Google products work together.

Basically, Faktor divides Google products into four distinct categories: Earn, Entice & Defend, Expand the Pie, and Experiment (Google’s 4 E’s). The first E groups what brings Google most of its revenue. The second group is formed by products that not only give more space to place ads, but also keep users devoting their time to Google. Here we can find the likes of G+ and YouTube. This mirrors what I said about Facebook wanting to keep eyeballs on their site on my last article.

Publicity fights for time and views. The more viewers, the more expensive the ad. Take for instance how the price of a 30-second ad on the Super Bowl reached $4 Million this year. And the more time a person spends on a given activity, say a TV show, the more likely advertisers would fight to place an ad there- hence the importance of ratings, as I discussed before.

Add that up to what Sergey Brin said on the 2004’s investor newsletter, 

“[…] incremental resources have diminishing returns in almost any undertaking, so it is not desirable to put all your resources on the core product.” 

This idea translates perfectly into to Faktor’s third E: Expand the Pie. As you spend more time on the Google network, the more valuable Google becomes. Suddenly, the openness of Android makes sense.

The last E, Experiment, groups endeavors that seek innovation. There’s little I can add here beside the fact that it makes sense for Google to devote time this kind of things (besides being incredibly cool).

Faktor did a marvelous analysis. Here’s a video he made [for suscribers (free) to IdeaFaktory] about Google which I highly recommend: http://www.ideafaktory.com/technology/google-strategy-part-2-the-deep-dive/ 



Up next... Why competitors must fear Google?

On Facebook

Facebook’s been on the news quite a lot lately. From the IPO’s letdown all the way to the acclaimed release of Home, Zuckerberg’s company has given a lot to talk about. There are a myriad of articles detailing different aspects about Facebook or its history. My plan here is to make an analysis of the company from different points of view and summarizing the important facts in a single place.

The Company

What’s Facebook’s deal? Yes, you know what Facebook is and how it creates revenue. It’s actually quite simple. You have a site full of active users that pour data freely into it in exchange of having a neat place to arrange what they want to share about their lives. Out there you have a lot of companies fighting to get more customers, but it is actually harder to pinpoint what people are more interested in your products and/or services than it seems. Therefore, Facebook connects the data it has gathered from its users with the companies that seek more eyeballs.

See, the problem is that a company can’t really be certain about how effective their advertisement strategy is. Take Nielsen, for example. According to their website, they “…study consumers in more than 100 countries to give you the most complete view of trends and habits worldwide.” Basically, they rate television, making ad placement more logical. Their ratings have been quite powerful in the TV industry, prompting cancellations of shows that didn’t reach a certain number in their rating. Lately, though, the traditional way to judge TV ratings has been questioned. 30 Rock won a lot of awards, Community was revived by the clamor of its fanbase, and Veronica Mars raised U$D 2 Million on Kickstarter after only 12 hs (a record) for a movie project- all of them despite low Nielsen ratings. You can read more about the topic here. Recently, Twitter and Nielsen have entered a partnership to take advantage of the trends data Twitter has.

(Note: Veronica Mars ended up raising over U$D 5 Million, 2.5 times its goal- which was already high to begin with for a Kickstarter project)

What I’m trying to get across here is that measuring viewers for your ads is not that simple, and in the past it was even harder to gauge the numbers of said viewers that: 

1. are interested in your product/service and; 
2. got around to actually spend money on said product/service. 

Big data is changing that right now. Big data is, just as its name suggests, a large collection of data gathered from every source possible (read more here). The business surrounding it is directed at ways to organize and analyze said data. Certainly, it can be used from different ways (like getting better information to make decisions). Facebook has tons of data on us (yes, you can find me on Facebook), which goes beyond the social giant’s webpage. Just look at all those Facebook sharing buttons all over the web or the many “Log in using Facebook” options out there. This, you can realize by now, is invaluable for advertisers.

Need more proof? Facebook’s data provides far more insight into its users than they would ever believe. For example, it has been found that the famous “Likes” on Facebook can generate profiles as accurate as personality tests. The Wall Street Journal posted an interesting article about it, which makes you wonder what else can be gleaned using Facebook’s data. Certainly, advertisers would love to get their hands on that.

Obstacles

There has been a lot of skepticism around Facebook’s ads effectiveness; especially around the time General Motors (right before the tech giant’s IPO) decided to pull its ad budget from the social site. Arguably, it isn’t exactly easy to pinpoint if ads are effective, like I explained above with the Nielsen rating example. On the internet, though, at least there is a bit of feedback since websites have the ability to track from where people are entering their site. Nevertheless, this isn’t as accurate- I could see an ad on Facebook about a laptop and not get to buy it until much later.

Before Facebook’s IPO, alarms were raised. Take this article that questions Facebook’s usefulness. Yet, I rather sympathize more with the views of Ben Kunz from Bloomberg Businessweek, “Making social-media communications work requires heavier lift than many organizations can muster.” Actually, that article is spot on. 

Another quote from the article states: “Keeping Facebook conversion rates up and customer acquisition costs down requires a constant battery of audience-targeting refinement, creative testing, and website ‘landing page’ adjustments.” I’m sure that those who have “Liked” different brands on Facebook have noticed that each one has a different type of engagement. The best way to build a relationship on the social network depends on each demographic, especially when seeking to personalize the experience; and that’s a new reality for advertisers to face.

Plus, we should frame the situation of General Motors, which was actually in the middle of a process of cutting its spending on ads (see previous link). This is strategically sound for GM. Look at it this way: You want to cut your spending without any sort of negative publicity (U$D 10 Million is a big enough figure for the press), and your social media campaign on Facebook hasn't been as good as you’d want to. In the process leading to Facebook’s IPO you hear skepticism about the ads effectiveness and you know quite well that there’s a period of time during that process (the blackout period) where the company can’t disclose financial information. General Motor’s leadership did a spectacular job on their decision to do so during that time. Yes, you can find a lot of places where GM denies it planned the timing, but to be honest, logic dictates they actually did. Certainly, any investor on GM should rather hope the timing was deliberate rather than a result of chance. It was pure genius, if you look at this way.

The move, though, gave Facebook a lot of headaches with the press. But, looking at the bright side, it created a lot of discussions regarding the appropriate way to use the new channel provided by the social network. Also, it might have helped push Facebook into perfecting its system.

I believe the most thought provoking article out there about the tech giant was written by Kurt Eichenwald, which details a fantastic study on Facebook and what kind of disruptions it has created on how advertisements are served. Basically, we have moved from flyers to radio, from radio to TVs, and from TVs to the internet (more or less). First, came Google, now we also have Facebook. He points out a rather important fact: Google did struggle at first with how it served its ads. Facebook is going through the same process, but it’s taking longer.

Why is it taking longer? Remember what I said before about Big Data? Let’s join the dots.

Big Data is on the rise. Companies are being swarmed by data, which they seek to put to good use. It is a booming business- just check IBM again. Google’s main business revolves around placing ads according to what you search for and your searching history. So you, the user, type words, giving that data to Google, which gives you information according to your input in return. In other words, you are signaling Mountain View what it should advertise to you by letting them get to know what you look for on the web. Based on this they create a profile on you. Simple.

Facebook is another story, though.

The social network has, obviously, all the data placed by its users lying around. We post and they have to organize that. In other words, it’s like getting random phrases of a biography and your job is to paste them in a way that is actually readable. Add to that the fact that social and psychological analysis of what the users are actually saying is another layer that must be studied in order to make sense of much of that data. Just remember the article about the study on “Likes” reported by the WSJ I mentioned before.

Also, and going back to Mr. Eichenwald’s great article, 

“[T]he Google concept of demand fulfillment—someone searches for a pink shirt and is shown an ad for a pink shirt—had an important place in Internet marketing, the pitch went. But Facebook was about generating demand by showing users content that they might not have otherwise considered.” 

Just as with the radio and the TV before them, companies struggle to adapt to the new channel. Facebook isn’t Google, and it won’t ever work the same way (on their main business core; we’ll get to G+ and GraphSearch later).

All this information must be taken into consideration by companies around the globe. Yet, taking this to Argentina, companies must give special attention to engaging customers through the social network. After all, the country is ranked #12 on Monthly Active Users with 21 Million people. That’s around half of the population. I’ll allow you to let that sink in.

Google and Facebook

Google is search, Facebook is social.

That categorization is crucial, since it explains how both companies’ approach to advertising is formed. Again, yes, G+ is a thing, but that’s not the way Google generates cash. Google makes around 96% of its revenue from AdWords and AdSense, which is a lot of money (read more about it here).

Google Plus is a strong competitor for Facebook’s dominance. Twitter may have a massive scale, but it works in a different manner. Certainly, it can cut the time used on either Facebook or G+, but it isn’t a potential killer (at least not yet). For instance, where would you share all those photos of your last vacations? Not to mention that there are things that you might like to keep on private even if you are tweeting openly to the public. And, you know, there’s Instagram, which now belongs to Facebook.As a side note, Vine is an interesting approach to the “share factor”, which makes it seem that Twitter is moving on a different direction than Facebook at its approach of social media.

G+ is the nexus of many Google products, which gives it many features that are quite interesting and useful. If you think about it, it has the power to replace various sites you might use by creating a place where you can get all of those features under a single log in. 

Probably, G+’s is perceived to be a “ghost town” since we do not have the same exposition as we do in Facebook. The Global Web Index found that despite Facebook users are using their profile more than users from G+ and Twitter, G+ isn’tthat far behind. But, that is in terms of percentage. Given the fact that Facebook’s daily active users eclipse G+’s, the difference becomes a lot wider. I’d make some calculations, but G+’s problem is that since it is integrated with the Google experience, it is hard to really know what “active” means for them (for instance, if I search for something on Google and click on the famous +1 without entering G+, does that count as active?).

Nevertheless, Global Web Index makes a strong point on the link I just gave you: Android will surely help boost G+ users. It’s no surprise, then, for Facebook to have developed Home. We’ll get to Home in a bit, though. This might also be the reason that Skype got integrated on Facebook, since G+’s Hangouts makes video chatting quite fun (to be honest, Facebook must step it up in that regard, since video chatting via Hangouts is, in my opinion, superior to Skype).

One last thing to note is that G+’s approach also differs on the openness of the network. In Facebook it isn’t common to relate to people outside your established networks, though it isn’t impossible to do using the Groups feature. On G+, on the other hand, it is very easy to build a network around interests. Probably this derives from Google’s stand on Open Source, but I’m just guessing that.

Yet, G+ is just the tip of the iceberg. What’s actually quite threatening about Google is Google Now. It is a phenomenal feature that gives results before you even ask for them. It shows just how much Google can get about us, but it is really handy as an assistant. It certainly makes Google far more appealing to use in mobile, which is where the money is going right now. It isn’t a feature that is a direct a danger to Facebook, but as an integrated experience with G+ it can certainly become an issue.

On GraphSearch

Quick, what is the first thing you’d do if you are using Facebook, but suddenly you find yourself in the need to find information? What do you do? Yes, you either move away from Facebook or open a new tab to use Google, Bing, or Yahoo! See the problem?

Every time you go away from Facebook to see another site, Facebook is losing. There’s a reason, then, to give simple services in one site: keep eyeballs on the ad-space you are selling. It makes sense, since every extra unit of time will increase an ad’s effectiveness.

Yet, there’s another important point to consider.

Most certainly, Facebook cannot give you the answers Google can. It isn’t that type of company- it teamed up with the underdog in search, Bing, to tackle that feat. But that’s not the point. The point is what GraphSearch truly mean: Knowledge and engagement.

It isn’t about searching for people and making connections. The objective here is to learn. What type of places, food, activities, etc. do you like? By making a search, users are giving information. Not only that, it makes Facebook a more useful site, which in turn translates in users spending more time on the social network. 

Sure, you can go and use more sophisticated sites, but when you want something fast, the law of “making the least possible effort” will entice you to use GraphSearch either way- at least some people will, and that’s already a win for Facebook.

I will agree with Nate Elliot, from Forrester, that this should have been done earlier, but the importance of the network of friends has actually little significance. Think about it: If Facebook’s core business is selling ads, then the act of not increasing your number of “ Facebook friends” isn’t actually signaling info to the site? Of course it is! In essence, the more you life is reflected digitally on the site, the more valuable the ads will be.

Again, Facebook is building a jigsaw puzzle out of each profile. The more pieces it can play with, the better the approximation it’ll achieve. And thus, the site becomes better at targeting ads.

Facebook still needs to give the system some quirks, though- at least for Argentina. I imagine it does a better work in the US, but over here it lists as “restaurants near you” some venues that I wouldn't name as nearby. An option to filter through (actual) distance would be great, and there’ll probably be no excuse now that Facebook may be buying Waze. (Edit: It seems talks into buying Waze have fallen after the company declined the condition of moving to California; read more here).

Facebook Home

The launch of Facebook Home is certainly the most interesting thing arising from the internet juggernaut on the last few months. Basically, it changes the way a smartphone is used by making the social network be the window to everything else on the phone. This has raised serious questions about the take Google would have on it since it means that any Android OS that uses it will be perceived as Facebook. Just think about it, where would Google products be? So far, though, they have received it well, but that might as well be simply good PR.

Android allows Google to promote its own apps, but it also follows their ingrained belief in Open Source, which explains the number of Android variants out there (like the Amazon Kindle’s custom Android OS). That’s the reason we aren't hearing about Facebook Home on Apple’s iOS. Apple likes to control what it releases (it is Closed Source advocate), which means the iPhone will get a different version of Home.

Facebook’s Android variant will surely help out to gather more data about its users, increasing the value for marketers. Specially, it’ll give the social network a new set of data regarding the apps each of us tend to use. This will also add the possibility of Facebook creating or altering parts of itself to adapt the most popular aspects of said apps and ramp up user engagement in the future.

What I find particularly interesting about Home is what it means for the future of the computer industry. The PC industry is passing through a huge disruption right now. Yes, this is old news: the tablets and smartphones are destroying PC sales. Just recently, Data Corp’s forecast on PC shipment was off the mark- and not in a positive way. Shipments fell by 13.9%. Lenovo seems to be doing fine, though. Somehow, it is the only large PC maker which continues to find great delight on selling traditional PCs. I don’t blame it, since its largest rivals are trying to restructure their business. Yet, the most affected company here is, in a way, Microsoft.

Microsoft is doing quite a lot of things right, but its momentum has been so off that it requires its own analysis. But there’s a point to be made with bringing Microsoft up. The Surface was a bold move from Redmond, but it has clearly not worked as intended. The idea on Surface’s background was to compete with the more intuitive approach and simplicity found on mobile devices. Not surprisingly, various complaints were raised from users using regular PCs.

Google, on the other hand, launched some time ago it’s Chrome OS for PCs. Their own idea was that what we use on a PC is mainly the internet (plus, they have their own Google products that replace Windows Office, Google Docs). Therefore, why do users need an expensive system? They just need enough power to access the internet.

A big problem of the computer industry right now is that casual users have found that they don’t really need all the bells and whistles from PCs. What would more processing power help with if they only run movies, casual games (like Angry Birds), or chat? Even more, what the hell is processing power for them? A tablet and a smartphone are more than enough for casual use, especially now that they even come with a great resolution.

What I’m trying to say is this: Moore’s law hit the consumer before it hit the limits of silicon.

The PC is long from gone, but the way they are used and the time spent on them is changing. But what exactly does this have to do with Facebook Home? More importantly, what does it mean for software companies?

Facebook Home brought a different way to communicate- ChatHeads. The feature makes chatting with friends more simple and elegant- you don’t have to go back to another screen and enter the chat option on your phone. It works just like regular chat clients on your PC. It isn’t exactly groundbreaking, but it reflects a great foresight from Facebook.

Quick, what hasn't changed much on mobile phones? Basically, the way they present themselves. We got a set of icons that lead us to sms, the phone address, etc. and we had to move back each time we wanted to move say, from a message to a mobile game. Not much has changed since then, does it? But ChatHeads runs the way we are used to on a PC. We don’t have to hop around applications.

This is where mobile is actually heading- all the features of a PC in your hand. The PC is great, there’s no real problem with it. It isn’t something that needs fixing. We have just unloaded a lot of the uses we used to give to PCs to smartphones and tablets. This, in turn, is funneling money from PCs into mobile. As Forbes points out, Facebook has done a great work unifying the mobile experience into a single roof. It isn’t, though, about making it resemble the way we communicate in the real world, but to make it resemble what we are used to in a PC. After all, the uses we have given PCs and the internet have already been integrated into our everyday lives. 

In other words, the consumer will seek mobile devices that keep incorporating PC functions into them, adding them to the advantages mobile already has.

Facebook Home needs some polishing, since reviews have been mixed. Hopefully it might follow Facebook’s usual way of continually changing in order to address users’ needs. Regardless, the strategy that gave birth to Facebook Home points out that the company is indeed looking into the future. The obstacle will be to make those insights translate into increasingly better offerings.

Finances

Facebook’s IPO stirred Wall Street after a lineup of fiascoes that ended up with skepticism and litigations against the company and its underwriters. I won’t comment on the matter, being outside the purposes of this post, which are to evaluate Facebook as a business. Therefore, controversies that don’t affect the way the company does business won’t be touched here. Nonetheless, if you are curious about an investment banker’s point of view, I’m giving you the following link to someone with a lot of expertise on the matter: The Epicurean Dealmaker. To be fair with Ebersman, Facebook’s CFO, though, the company did meet with the $5 billion forecast on 2012’s revenue, which sort of makes the whole story a bit ironic.

(Note: the graphs are all in millions unless stated otherwise)

Revenue grew by around 37% on 2012, almost reaching $5.1 Billion.

Yet, the gap between revenue and costs and expenses narrowed a lot, eating away more than 80% off it. This goes against the trend of the last few years in which the gap was quite ample.

 

This, though, has nothing to do with the Gross Profit Margin, which averaged 75% since 2009. The gap, then, must be caused by an expense outside the cost of revenue. That is more clearly illustrated through the following graph:

As you can see, the Cost of revenue remains constant throughout the 3 fiscal years. Most of the growth lies in R&D. After finding this out I decided to calculate the distribution of income, which looks like this:

Distribution of Income	2010	2011	2012
Costs & Expenses	47.72%	52.68%	89.43%
Interest and other income (expense), net	1.22%	1.64%	0.86%
Provision for income taxes	20.36%	18.73%	8.67%
Net Income	30.70%	26.95%	1.04%

The Net Income takes a big hit out of the growth from Costs and Expenses, but as we saw earlier, that is caused by the growth in R&D expenses. Most likely, after the questions that were raised after the IPO, Facebook must have pushed to develop new ways to strengthen its position- mainly on mobile, which was one of its lacking points.

The hit on the Net Income, though, had a negative impact on Facebook’s ROA and ROE, but given that we know why it isn’t really alarming. Issues will only appear if the investment on R&D doesn't pay off as expected.

Investing on mobile is the right choice, not only because that is the current trend, but because the quantity of Facebook’s mobile MAUs has been increasing a lot in the last year while there was no clear way to monetize them. To put this in perspective, by March 31^st, 2012, Facebook had 488 million Mobile MAUs and by December 31^st, 2012 it had reached 680 million Mobile MAUs worldwide (source: Facebook 10-K Annual Report 2012) - that’s around the same number as the population of Brazil!

It is also important to point out is the differences of the Average Revenue per User (ARPU) around the globe. The worldwide average for the end of 2012 was $1.54. Nevertheless, the most important market for Facebook is, not surprisingly, in the US and Canada, with an ARPU of $4.08. Europe follows with $1.71, Asia with $0.69, and the rest of the world with a mere $0.56 (as of the end of 2012, though the trend hasn't changed so far during the current year).

Another interesting point I noticed was the growth of Facebook’s assets during 2012.

The increase in Assets was mainly composed of a change in Current Assets. Yet, despite all Current Assets grew from 2011 to 2012, the one who gave a huge leap were Facebook’s Marketable Securities, which grew by $4.8 Billion, reaching $7.2 Billion dollars.

Moving to the Cash Flow, the Net Cash provided by Operating Activities stood around the same number from 2011. This, again, has to do with the Net Income being really low compared to the previous periods. The Net Cash provided by Operating Activities was of $1.5 Billion for 2011 and $1.6 Billion for 2012. Yet, for example, if the Net Income had been the same as the one in 2010 ($0.6 Billion), then we’d be talking of around $2.2 Billion of Net Cash provided by Operating Activities.

As for the Net Cash used in investing activities and the Net Cash provided by financing activities, they both got a huge increase between 2011 and 2012. Financing Activities’ growth is easily explainable by Facebook’s IPO. Net proceeds from issuance from common stock reached $6.7 Billion- a lot of money. Meanwhile, Investing Activities’ growth was caused by the purchase of marketable activities, which was around $7.3 Billion more than in 2011.

This made the total of Cash and its equivalents at the end of 2012 reach $2.3 Billion, $0.8 Billion more than in 2011.

Other metrics I believe you’ll find interesting are the following:

Facebook Metrics	2010	2011	2012
Current Ratio	5.7738	5.1212	10.7101
Debt Ratio	3.6111	4.4211	4.5111
Debt/Equity Ratio	0.3830	0.2923	0.2848
Debt (long term) /Equity Ratio	0.2031	0.1088	0.1953
Working Capital	$    1,857.00	$    3,705.00	$ 10,215.00
Operating Cash Flow/Revenue	0.3536	0.4174	0.3168
Operating Cash Flow-Dep./Revenue	0.2832	0.3304	0.1892
Income Tax	0.3988	0.4100	0.8927
Free Cashflow	$       405.00	$       943.00	$       377.00
Free Cashflow/Op. Cashflow  Ratio	0.5802	0.6088	0.2339
ShortTerm Coverage	1.79434447	1.72302558	1.53231939
Capital Expenditure Coverage	2.3823	2.5561	1.3053

Any mistakes on their calculations are entirely my own. Yet, I managed to corroborate some of them with the ones shared by MarketWatch and Yahoo! Finance. I recommend you to check their sites, since you’ll have more info on years 2010 and back and get the EPS metric, which I’m reluctant to calculate since I have no data on the movement of shares.

The current analysis is almost entirely based on the numbers found on Facebook’s investor relations page:. For more interesting graphs go here.

Conclusion

Facebook has a lot of obstacles ahead, but the company seems to be going in the right direction while also having a strong financial position. The transition to mobile poses a big challenge since mobile ads aren't as profitable as their desktop counterparts, but this particular issue is also shared by Facebook’s competitors, including Google. This might be a potential danger for finances as consumers keep moving into mobile, so the proper investment in R&D is more than necessary.

Therefore, your take on Facebook must rely on your faith on its management and if you don’t mind Zuckerberg’s over 50% of voting power. GraphSearch and ChatHeads prove the company has the right mindset going into the future, so what’s left is for it to make said vision materialize into new streams of revenue.

One thing is certain, as a promotional tool, Facebook cannot be ignored. Companies must invest on promoting their brands beyond the traditional ways of posting offers, sweepstakes, and the like, by engaging customers and taking them nearer to the brand by building a personal brand voice. This is vital in countries like Argentina, where a large portion of the population actively uses the social network.