Facebook Inc. (NASDAQ:FB) just keeps getting more valuable, because Facebook stock is a diverse stock in and of itself. That won’t shield it from another internet bubble burst, but buying a company with physical, real world assets might. New media companies are now as vulnerable as they were the last time the internet bubble burst.
I can tell you exactly when that happened: January 10, 2000. That is the day AOL bought Time Warner for $162 billion. While most reported the deal as Time Warner buying AOL, AOL shareholders got 55% of the resulting company.
The price represented the peak value for internet assets, when compared with real world assets like TV networks and movie studios. Once the peak value was established, traders started looking for a bottom and found it wasn’t there.
Could the same thing happen today? Yes, it could. Because when it comes to cloud, we’re in the same position we were then.
What’s the Cloud Worth?
We don’t know the absolute value of networked cloud data centers, in terms of what they can command in the real world. We’re guessing.
The five major cloud companies, the Cloud Czars if you will, Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOGL) and Facebook, are currently worth about $3.9 trillion.
The combined value of the Dow Jones Industrials at the end of March was $6.6 trillion and note that both Apple and Microsoft are included in that. These two companies, by themselves, represent more than one-fourth of the Dow.
For most of the Cloud Czars, we can compare market caps to sales and get what seems a reasonable figure. Apple had revenue of $229 billion in 2017, so it’s selling at a little more than four times sales. Amazon had $177 billion in revenue and is selling for about 4.6 times sales. For Google the ratio is about 7.2, for Microsoft 8.6.
For Facebook, it’s almost 14 times sales. Facebook stock results are entirely driven by advertising revenue. The ratio is high because Facebook, having no assets other than its data centers, is insanely profitable, having brought 40% of 2017 sales to the net income line, growing them by 45%.
But this is all goodwill. There’s no “there” there at Facebook. The content comes almost entirely from users, at no cost, and the ads are sold entirely by computer. So how could Facebook become more real?
What if Facebook Buys Disney?
Simple. Facebook buys the Walt Disney Co. (NYSE:DIS). Disney has a market cap of $162 billion, and $55 billion in sales, with just $19 billion in long-term debt. An all-stock bid of, say $200 billion would be hard to resist.
In this case, Disney shareholders get nearly 40% of Facebook stock. Facebook would have to give Disney autonomy, but in theory this would also give Disney the stock market firepower to take out most of 21st Century Fox Inc. (NASDAQ:FOXA). Its current bid is $52.4 billion, all stock.
Initially analysts would love this. But it would establish a maximum value for Facebook’s assets, which is about twice those of Disney and Fox combined.
From there, watch out below.
The Bottom Line on Facebook Stock
Facebook’s stock market value is as an advertising company, but its real value is based on its network of cloud data centers, on which it will spend $14 billion this year.
Facebook needs cash flow to fill those data centers, Disney needs market power to achieve its media aims, and on the surface a deal looks magical.
But it also puts a maximum value on the Facebook network. By extension it puts a maximum value on the networks of the other Cloud Czars as well.
Once the maximum value of cloud assets is realized, watch out below.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.