Last quarter saw the first significant decrease in the value of social media users on major social media platforms since the demise of MySpace. Wall street investors are now taking a more traditional approach in evaluating major social media platforms such as Facebook, Twitter, and LinkedIn, scrutinizing their business models in order to determine how much users are actually worth. Investors are now looking at these firms using more traditional metrics as opposed to the non-GAAP approach typically used in silicon valley.
This more traditional approach has been validated in industries like publishing and television, and has proven to paint an accurate picture for valuation and growth potential. The fairly simple formula divides the market cap by total users, resulting in the per-user valuation for the platform. Before this quarter many social media platforms continued to show growth, and increase per-user value simply by adding users to drive up advertising costs, subscriptions, etc. These more traditional valuation metrics are now focusing more on the specific business model, and how the platform is able to translate users into dollars. The article suggests that increasing the user base simply isn’t the answer.
So how much are we worth right now? Last quarter numbers value the average Facebook user at $122 dollars, down from $126 last quarter the least dramatic drop of the major social media platforms. Wall Street still sees Facebook’s business model as a profitable and efficient mechanism that efficiently translates their user base into revenue. Twitter per-user valuation dropped to $70 from $110 from last quarter, showing a significant decrease per user and bringing into question their current business model. There is also more of a disparity among popular Twitter users that generate significantly more revenue than average users, such as celebrities, athletic teams, and other various products and companies. LinkedIn also showed decrease in valuation, dropping from $63 dollars per user as opposed to $84 last quarter.
How do you think the drop in per user value will affect the way these major platforms operate in the future?
How do you think this will affect our experience as social media users?
Do you think that wall street is taking the right approach in evaluating these companies?