CTR Half-Lives: NASDAQ's Biggest Unasked Question
With their IPO getting closer and closer, the massive variance in opinions as to Facebook's enterprise value can be seen from Wall Street to Main St. On the buy side, you have grandmothers calling their Silicon Valley grandkids to say they plan to buy shares at the IPO, and sell-side analysts baking four as-of-yet non-existent lines of business into Facebook's current enterprise value.
On the sell side, most discussion forum trolls, direct response advertising guru's and employees at Google, Amazon, eBay, Yahoo and Apple are equally confident Facebook's IPO will crash and burn, relative at least to the presumed $50-100Billion valuation.
Me? I know better than to make a call here, but I will say this: whether or not Facebook lives up to the valuation hype will depend more than anything on their ability to deal with the fact that their standard ads have a click-thru-rate (CTR) half-life of approximately two days. As the below chart from WebTrends shows, Facebook ads' CTR typically halves within 48 hours, due to the simple fact that their targeting system results in largely the same people seeing the same ads.
If Facebook solves the half-life problem, then their massive user base and engagement levels allow for a sustained $50-100B valuation. If not, Facebook's revenue growth will quickly fall to zero and it'll become a mid-tier cash cow.
Solutions to this problem exist...