Disclaimer: I’m not actually investing my entire retirement savings in Facebook, nor would I suggest anyone, anywhere ever invest a large part of their savings in one stock. That said, if I weren’t trained in the art of diversification, I probably would. Here’s why:

Google isn’t afraid of Facebook ads on Facebook, they’re afraid of Facebook eating Adsense. And they should be.

Google makes just under $10 billion a year (over a quarter of their revenue) from Adsense – ads they place on other Web sites. Google can make these ads effective because they can combine their understanding of what is on the page with your recent searches to put an advertisement on the page you are highly likely to click on.

Look at their overall growth and their growth specific to Adsense. I’ll throw in last year’s Facebook revenues for kicks (more than 2X Google’s pre-IPO revenues). Google’s growth is truly astounding:

Facebook has no competing product because, at this moment in time, they can’t make as much on a given ad as Google can and adsense is a winner-take-all game: if your ads make a publisher 5 percent less, no publisher will run your ads.

Google only has to be marginally better at monetizing ads to entirely dominate the market – and they are significantly better right now.

But think of all the ways Facebook has begun learning about you and specifically your shopping habits in the last 12 to 18 months: Facebook’s Like button on every page means Facebook knows the products you are looking at. Think of the race by publishers to volunteer information about you to Facebook – this is going to be huge.

Even if you didn’t click on the Like button, Facebook probably has a pretty good idea of what your next purchase will be.

Up to this point Facebook hasn’t done much with that information besides litter your feed with it. They have 2x more pageviews than Google, leaving them with so much ad inventory that they can hardly fill it all. You can be sure Facebook’s engineering teams are working hard to monetize that data:

The naysaysers look at Facebook and complain that they monetize horribly, but they don’t understand that a perfect ad network requires data, tons of pageviews, and advertiser familiarity. The success of Adsense is in part ecosystem development: advertisers have spent a lot of effort and money to make high performing ads, meaning they can afford to spend more on every ad.

Facebook is one of the only companies that has both the data AND the pageviews to threaten Google’s stranglehold on remnant ads.

Here’s why:

Estately's Galen Ward

As Facebook gets better at targeting, advertisers will spend more money on Facebook ads. Facebook doesn’t have to monetize as well as Google at the start – they only have to help advertisers convert at all and advertisers will throw more money at their ads.

As a result, Facebook will be responsible for more purchases and will justify moving more advertiser dollars to Facebook. A nasty side effect of this for Google: advertisers will reduce their spend on Google ads.

And here is the double whammy: Once advertisers start moving to Facebook, they will get better at targeting Facebook’s platform and as they get better, they will increase their spend per click. Wash, rinse and repeat through enough cycles and Facebook stands a high chance of creating better performing ads – for 3rd party website consumption – than Google.

The day Facebook ads monetize even 1 percent better than Google ads, the biggest publishers will pull Adsense and it’s a matter of time before Adsense is dead.

Do the math on this: instead of growing it organically, we wake up one day and Facebook has taken over Google’s Adsense business. That’s $10B in revenues alone. On top of that, Facebook monetizes advertisements on Facebook proper equally well. This is Facebook, with 2x the impressions today – at the time of their IPO! – of Google. That’s a much higher margin business.

As they say in Hollywood, this is the bad version of the story. Facebook has bigger and better opportunities than replicating and killing Adsense. But if the bad version ads up to $10 billion a year, the better versions will add up to even more. How much more? We’ll see in a few years.

Editor’s note: We’ve added a disclaimer at the top of the post from Galen Ward to make it clear that he’s not investing his retirement savings in Facebook. The original headline was written tongue-in-cheek, and we’ve altered it to better reflect his thoughts. 

Galen Ward is CEO of Seattle online real estate startup Estately and a mentor at 500 Startups. You can follow him on Twitter @GalenWard

Previous Facebook coverage on GeekWireOpen Letter to New Facebook Millionaires: Pay off mom’s mortgage! (And 5 other tips)… A little piece of Facebook: Would you invest in Zuck’s big IPO?… After all-night hackathon, Facebook rings opening bell

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  • Guest

    Thank you, Galen, for believing in the future of our technology world. I have it on good authority that Facebook will be worth 40 times as much as it is today based on projected growth patterns. So many people and businesses will benefit from a company that has already literally changed the course of human history.

    • galenward

      It’s easy to be a hater. So while I didn’t *actually* put my retirement in Facebook stock, the anti-Facebook sentiment reminds me a lot of the anti-Google sentiment when they went public. 

      • Guest

        I don’t hate you, Galen; I like you. That’s why I was curious about what you were doing with your money based on the sensational, eye-catching headline.

        I’m very glad to see that you didn’t actually bet your retirement solely on Facebook stock, but I expect that you are still invested in instruments whose managers may select Facebook. That would be good.

        • galenward

          Ha! I meant Facebook haters, not Galen haters. :)

          I believe the market-based index fund that most of my savings is in *does* probably own some FB stock now. 

      • Trustme

        Be sure to read my article on Monday. It’s titled: Why I’m betting my retirement on YELP stock today. Only I won’t really be, of course. It’s just link bait.

        • Guest


          “You see, as a blogger, I’ve learned that every publicity stunt I throw
          myself at makes me a more interesting person to myself. It doesn’t even
          matter if I succeed, as long as I write a detailed article explaining my
          plan, a few daily posts reiterating how mundane my life is and always
          has been, and a lame excuse as to why I couldn’t make it more than six
          weeks before resorting to my previous behavior.”

      • Guest

        Be sure to read my article on Monday. It’s titled: Why I’m betting my retirement on YELP stock today. Only I won’t *actually* be, of course. It’s just link bait.

      • Markjmayhew

        What similiarities *could* there be, Google stock went up, leaving investors happy. While we don’t know exactly how badly Facebook has crashed (losing 19% in three days and counting is definitely a crash), of course it’s investors are angry.
        Good post, btw!

  • Guest

    Your analysis would be a lot more compelling if you actually dealt with the various real/perceived negatives associated with FB or actually tried to quantify future earnings. I think FB will do okay as a multi-year stock investment. But it’s starting at a very high valuation to begin with and the float could double within 90days given the atypically short lock up period. I will probably buy some on a pullback, but certainly wouldn’t back up the truck today.

  • Guest

    It’s wonderful to see how little hype has been built up around this IPO.  Everyone is approaching this investment with a sober mind and a clear understanding of the fundamentals.  We’ve learned a lot since 2000.

    Yup. Really.

    • Guest

      Congratulations to everyone for keeping Facebook’s valuation close to the peg! We’re very glad that there was no massive run-up in price that would threaten Mr. Zuckerberg’s control of the company.

      • Guest

        Mr. Z’s majority control of the company is assured regardless of the stock price.

        • Guest

          Whew! That’s good to know. We’ve learned a lot since 2000, as Andre said.

          • Andre

            Yes, indeed.  We’re all financial geniuses now, like our flush-with-cash friends in Greece!

          • Guest

            Gods, Beth. Our flush-with-cash gods in Greece.

  • Guest

    Really crazy to bet your retirement on any single stock, but especially so on one as likely to be overvalued as Facebook.  Hope this works out well for you, but I very much doubt it will.

  • Guest

    Facebook may have great long-term prospects but I wouldn’t be a buyer until I’ve seen more evidence of their ability to earn revenues and implement some of the systems you discussed.  I also want to see how MZ functions as CEO.  Creating and running a website is one thing.  Running a profitable business as a going concern is something else entirely.

  • Nun

    When I go shopping, I use google to help find information and products and online stores.  I never use FB to search.  Google knows what I’m shopping for at the moment.  FB knows what I have befriended and “liked.”  FB can never suggest a search result, and therefore I’ll never click on a FB link to buy something.

    Really, we’re talking about 2 different kinds of advertising.  FB ads seem closer to  TV/radio.

  • http://blog.sentientmonkey.com Scott Windsor

    I’m betting all my retirement on friendster. Those guys are still around, right?

  • http://sethish.com Seth Woodworth

    Do you realize your graphs compare google’s display network to google profits overall right? Facebook doesn’t show up in these graphs at all.

  • http://profile.yahoo.com/Z5DQCE7YHKZZWEDZIZLDYUUW5M ninja

    You’ll have quite the future as a walmart greeter.

  • Guest

    So you bought a FB for $41 per share today and trying to have people buy and push the stock up? The overview is pretty subjective while no disclaimer. People have their own brain, you know.

  • Chris

    It’s very dangerous statement. Kids, diversify – it’s the #1 key to stocks.

  • Guest

    Glad you liked it at $40. Because based on today’s lukewarm debut you’re going to have a chance to buy more at $30.

    • Markjmayhew

      True dat! (Like today…hell it might end the day lower then that.

  • Asd2

    Sorry to burst your bubble but you don’t need more data to place ads, you need quality data to place ads, and facebook has been failing miserabily at the later for years.

  • http://www.facebook.com/people/Kelly-Smith/573153409 Kelly Smith

    Interesting but the jury is still out.  Even so.  Congrats to the Facebook guys on their IPO today.  http://www.huffingtonpost.com/2012/05/15/general-motors-advertising-facebook_n_1518862.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+HP%2FBusiness+(Business+on+The+Huffington+Post)

    • Markjmayhew

      Yes, congrats FB on having the worst ever IPO in history (down 19% in 3 days of trading) 0_o

  • Guest22

    The underlying presumption in this argument is that Google will remain static and that consumers will remain static.  i.e. Facebook overtakes Google based on today’s reality, but, will do so a few years from now.

    Google are not static.  Other ad services are evolving (or shuttering) and the consumer market is in perpetual flux; particularly to mobile, where no one has a clue about how to eek out ad value in a tiny, very personal, generally ad-free space.

    What ad/tech/mktg folks forget is that with the exception of iPhone users, people sort of hate ads.  Advertising pretty much sucks.  No matter how clever the placement or targeted, they are annoying little things (Remember when we all worshiped TIVO?  Why? Because we could AVOID ads).

    Turning Facebook into an ad network “first,” is a sure fire way to alienate the next generation it needs to attract and hook (pre-teens).  

    Believing Facebook is Forever is far too risky to bet my retirement on.

  • http://lianza.org/ Tom Lianza

    Predicting the future is always hard, but one thing about your analysis that raised a flag for me was this:

    “The day Facebook ads monetize even 1 percent better than Google ads, the biggest publishers will pull Adsense and it’s a matter of time before Adsense is dead.”

    The inverse of that – the day Google ads are better than Facebook ads – is today.  But, you’re not betting on Facebook’s death, you’re betting on their innovation to overcome that.  Why would you assume that Google is not, and will not, continue to innovate as well?  Is it that Facebook’s knowledge of us is so amazing, and no other source of data will produce ads that are as compelling?

    • galenward

      Facebook has more opportunity. 

      Google has been optimizing for years on a dataset that hasn’t changed much while Facebook’s data is growing in leaps and bounds (activity feed, etc.) such that they haven’t had an opportunity to begin to optimize yet.

  • Bugger

    Your analysis is wrong. Google’s $10B per year “revenue” on AdSense is gross revenue. It does not include traffic acquisition costs — the amount it pays out to AdSense partners. Put that in, and you’re down to about $3B last year.

  • Guest

    Actually, Galen, did you actually buy Facebook stock in your retirement account? You didn’t actually say anything about that in your article and I can’t verify it online. Would you kindly check your Mint privacy settings?

    • galenward

      You got me! I would never put my savings into any stock, no matter how excited I am about it.  

      • http://www.jakeludington.com Jake Ludington

        So we can safely assume that nothing else in the post has any basis in fact, since the title is an outright lie?

        • galenward

          Nope – the rest is true!

          • Darwin


        • Guest

          Daisey’s Law: If you have something profound to say, a few lies here and there add spice without deducting credibility.

      • Guest

        Awesome. Now you have the same credibility as FB’s underwriters.

  • Guest

    Day 1:  The institutional investors tried to prop up the stock so it would not fall below $40.01 during mid-day trading.  Near Closing, they were propping it up to stay above $38.01.

    Projections are that those prop-up buys won’t last into next week.

    Starting with a valuation at 100x P/E (when every sane, successful business is at 15-20x) doesn’t leave a lot of room for stock growth.  But does leave a lot of room for decline.

    Plus, yeah, people hate ads.  Selling an ad-network as a cool destination for 13 year olds? Bon chance, mon ami.  

    The potential to take down an entire ecosystem is not far fetched when you look at how Zynga performed today.  Anyone who isn’t a little bit worried and cautious at this point, well, bless them, everyone.

  • http://twitter.com/rogueleaderr George London

    The pricing of a publicly traded stock represents the market’s collective expectation for earnings growth. You could turn out to be right that Facebook’s earnings will explode, but you would still lose money if everyone else in the market thought that earnings would grow even faster than you did.
    Facebook debuted at a higher P/E than Google did, so expectations are damn high. Why do you think you have better insight than thousands of professionals who make a living analyzing these things fulltime?

  • http://codeflow.org/ Florian Bösch

    Just to make this clear, even if facebook was the most stellar stock you can possibly have, unless you can actually co-operate with facebook and steer their fate, you should not bet your life on them. Investing 100% of your liquidity in a single asset in a single asset class is just a kind of risk that you should not take on.

  • ComeOnGeekWire

    The title is terribly misleading.  Shame on GeekWire for resorting to this, just to get clickthroughs.

    • johnhcook

      Thanks. We took Galen’s headline as tongue-in-cheek, but I realize not everyone did, so he’s added a disclaimer, and I’ve altered the headline. Thanks again for the feedback.

      • Greg

        John, you guys really blew it on this one.  Badly hurts the credibility of GeekWire to publish things like this.  Really unacceptable for the title to be “why I’d bet my retirement on Facebook stock”, the entire article to be about why Facebook stock is such a good buy, the end of the article to say market order placed, and then you come back and say it was all tongue-in-cheek and none of it is true?  I’ve been rooting for you guys and GeekWire from the beginning, but this looks like TechCrunch-level crap.  You need to pay attention to this, John, and keep it from happening again.

        • Guest

          I agree.

          John, if I wanted hype and fiction, I’d read TechCrunch. I read GeekWire for news. 

      • Darwin

        Sure you did moron. Click bait and you know it.

  • Guest

    “The title is terribly misleading.  Shame on GeekWire for resorting to this, just to get clickthroughs.”

    “John, you guys really blew it on this one.  Badly hurts the credibility of GeekWire to publish things like this.”

    ^^^ The only truth on this entire page, unfortunately.

  • Lame

    Follow-up post requested: “Why I’m too chicken to bet my retirement on Facebook stock, even though I said I would”

  • Dufcfaemid

    Facebook losing GM as a paid advertiser is a speedbump. Losing the long tail of advertisers would be a disaster. As a small business owner and part of that long tail, my recent experience using Facebook paid advertising resulted in a disappointing 0.035% CTR – not much lower than their purported average CTR of 0.04%. Compared to Google’s average of 2% CTR, I won’t be in a hurry to repeat that experience…

  • IantoCooper

    After Facebook’s IPO tanking, are ya rethinking your retirement strategy?? :p

  • Drew

    Just glad there was a thumbs down button. I enjoy other things you have written but not this. And by reading the other replies, I can see that the content equals the people responding….I’m sorry, 40 times current?(insert big laugh)…facebook will never make that type of growth over google, ever. I think your readers should understand that you have to take in actual factors and not speculation when making such a bold statement…and by the way, did you factor inflation while doing on the rev comparisons? (logic says no)

  • Koko

    Yeah right. How much do they pay you?

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