This Stock Could Have Been an 80-Bagger

In an eye-rubbing moment, Bloomberg BusinessWeek is reporting that Facebook's valuation is up to a whopping $41 billion.

The reporter's source is an unnamed one with access to transactions on SecondMarket.com, a website where stock-owning employees at privately held upstarts can sell their shares to third-party buyers.

Even if the account is true, it obviously doesn't mean that Facebook is worth that much. It would make the social networking site the country's second most valuable dot-com that relies primarily on ad revenue. Only Google (Nasdaq: GOOG  ) would be more valuable.

Facebook is rocking, but it leans primarily on ho-hum display advertising. Registration growth is also decelerating on a percentage basis. It's not that $41 billion isn't possible. It just doesn't seem sustainable beyond a single second-market equity swap.

However, if Facebook is really worth more than $40 billion, it would only force me to shake my head harder when I think about what United Online's (Nasdaq: UNTD  ) Classmates.com could have been.

Classmates dismissed
Stories of near misses with Facebook-esque fame are plentiful.

"We can't always assume that MySpace will be the top dog," I wrote about News Corp.'s (NYSE: NWS  ) then-happening hub four years ago. "After all, pioneers like Friendster and Tribe.net once ruled the social networking roost."

MySpace, Friendster, and Tribe could have been today's Facebook, but Classmates was around even before then.

Unfortunately for Classmates.com, the site decided to stick to a premium model. It figured that folks would shell out good money for subscription access to their former high school and college buddies. It never dawned on Classmates, it seems, that the better model for viral growth would be to tear down the pay wall and let the billable ad space on their page views bring home the bacon.

United Online acquired Classmates.com for $100 million in 2004, just as Mark Zuckerberg was coding magic in his Harvard dorm room. It tried to go public three years later -- when Facebook was turning heads after a Microsoft (Nasdaq: MSFT  ) investment valued Zuckerberg's young company at a whopping $15 billion -- but it had to scrap the IPO.

Despite having 2.7 million paying subscribers, Classmates had a long trail of operating losses. With free social networks growing at breakneck speeds, it was hard to round up interest in a site that was unfashionably early to the nostalgic appeal of alum interactions and losing money despite the stiff cover charge.

This classroom's a mess
A year ago, I got an email from Classmates. A high school pal that I hadn't heard from in ages had signed my virtual guestbook. I didn't have access to it, since I wasn't a premium member. I never had been. Like many users, I registered on the site ages ago, laughed at the tollbooths, and drove the other way.

This week, I was sent another promotional pitch, offering me free email exchanges for a limited time because this marked 25 years since my high school graduation. I decided to take this opportunity to see if Classmates had learned the Web 2.0 lessons that it had flunked out on earlier.

Frustrated at what I was able to do on the site with my limited access, I bit on a seven-day free trial offer. I know how these bait-and-switch schemes go, so I canceled the moment I was done sniffing around.

What a joke. Able to finally access the 2009 "signature," it turns out that there was no message. It was just an old chum who had checked out my profile. I decided to check out the message board for my high school and university. Both were dead. I was only the second person to visit either forum this month, and there were threads dating as far back as 2003 among the most recent posts.

I was teased about digitized yearbooks, so I checked it out. Unfortunately I'm not from my high school's class of 1976 -- the one and only book on the site.

People actually pay for this?

Pay the right ransoms
There's nothing wrong with premium models that offer premium experiences. Folks pay Ancestry.com (Nasdaq: ACOM  ) an average of $18 a month because the leading genealogy site has billions of digitized records and a lively roots-digging community. Drivers pay Sirius XM Radio (Nasdaq: SIRI  ) for access to commercial-free music and dozens of proprietary talk channels.

How well would Ancestry.com be doing if its product weren't as good as free family-tree builder Geni.com? Would Sirius XM be able to keep its satellites going if it were offering programming that was inferior to terrestrial radio?

Classmates is a website that relies on the free flow of information, yet the pay wall and protective contact tactics keep it from being the viral winner that it could have been.

United we strand
United Online commands a market cap of just over $0.5 billion. It's about far more than Classmates.com. Its flagship business remains low-cost online access through NetZero and Juno. It also runs florist exchange FTD.com and loyalty rewards site MyPoints.com.

Things could have been so different if United Online had gone for the mainstream jugular with Classmates.com. It already had a healthy head start over Facebook when it was acquired, but United Online stuck to the premium model, when the model itself dictates an inferior social network.

If it were Classmates backed by a $41 billion valuation -- and not Facebook -- United Online shareholders would be sitting on an 80-bagger right now.

It's not as if United Online didn't have a clue. Its NetZero service turned heads initially because its name actually stood for a free, ad-supported ISP. It offers a limited form of that now, but ad-supported user-generated content is a lot easier to bankroll than a free access provider.

Maybe it's not too late, but if United Online ignored my plea to tear down the wall three years ago -- when Facebook was still vulnerable and in the crib -- I'm sure the company and its poorer shareholders aren't hearing me now.

Do you own a company that just missed out on something huge? Share your thoughts in the comment box below.

Google and Microsoft are Motley Fool Inside Value selections. Ancestry.com and Google are Motley Fool Rule Breakers recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz remembers when social networks were an offline endeavor. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 17, 2010, at 3:52 PM, pete163 wrote:

    This has got to be a JOKE, right!

  • Report this Comment On November 17, 2010, at 4:28 PM, retin52 wrote:

    Say it ain't so Rick. You are better than this. Classmates is a 60+ million member network. This is nearly double the number of members since it was acquired by United Online, not to mention, Classmates has more than doubled their pay accounts since the buyout. Classmate's new campaign, that is aimed at converting more of these free members to paying customers, is also proving effective, as you too were compelled to sign up for the free-trial offer. By all metrics, Classmates is a success story and will be a much talked about growth company for many years to come. Try saying that about facebook in five years.

  • Report this Comment On November 17, 2010, at 5:51 PM, nin4086 wrote:

    retin52...you are kidding right? or are you classmates's CEO? :-)

    I tried classmates.com way back in 19xx, found it utterly useless and don't know anyone who uses it. Never knew they had a paid subscription model...also can't believe someone shelled out 100mil for it in 2004 way after the dot com mania. LOL ROTF

  • Report this Comment On November 17, 2010, at 6:31 PM, retin52 wrote:

    nin4086...you are either very clever or outragously stupid. You tried Classmates? You don't know if they have a pay subscription model? WOW!! I suggest you check out the new website. Classmate's website has changed a lot since 19xx. ROTFL

  • Report this Comment On November 17, 2010, at 9:00 PM, southernbeachguy wrote:

    I generally disagree with a lot of Ricks stories, but having used Classmates for a number of years have to agree. Classmates was great, for a number of years, but Facebook is able to find more friends and is easier to use. PLUS, I do still pay classmates, but I don't really feel that I get my moneys worth.......... I evidentally throw away more money than I should.

  • Report this Comment On November 18, 2010, at 8:33 AM, bodeese wrote:

    As a paid member I complained to Classmates about the bothersome way they displayed their advertising. This was a very annoying drop down in the middle of reading something. My response from classmates.com was "that is how we keep this site up and running you can just click the little x to get rid of them " Duhhhh. I replied with "are you even remotely familiar with Facebook? it is free and reading adds is an option." In closing please give me a step by step way of discontinuing on Classmates. Too their credit they did.

  • Report this Comment On November 18, 2010, at 11:23 AM, jefffawcett wrote:

    <<By all metrics, Classmates is a success story and will be a much talked about growth company for many years to come. >>

    that is the funniest thing I have read in a long time. Thank you for posting. You should write for The Onion.

  • Report this Comment On November 18, 2010, at 2:24 PM, EllieB100 wrote:

    <<How well would Ancestry.com be doing if its product weren't as good as free family-tree builder Geni.com?>>

    You are kidding, right? Geni.com does not even provide the same service as Ancestry! Geni.com is a wiki family tree building site (that is pretty awful, actually). Ancestry has a tree building/displaying option but its main business is RESEARCH, RESEARCH, RESEARCH! Goodness. Do your homework before you make a comment like that.

  • Report this Comment On November 18, 2010, at 2:41 PM, retin52 wrote:

    Classmates was losing money when United Online acquired them. They are now very profitable and growing (doubled in revenue the last 5 years)!! What is funny about this? Tell me? What is astonishing is that you insult me for giving a truthful, unbiased comment to this article. I think most people would agree that personal attacks do not belong in this forum designed for inteligent thought exchange.

  • Report this Comment On November 18, 2010, at 5:41 PM, TMFBreakerRick wrote:

    Ellie, please re-read the point. It's saying that Ancestry.com IS growing well because it IS better than the free alternatives. That's the point. It poses how bad things would be for ACOM if that wasn't true.

    Retin52, what you call "growing" I call a division where net revenue FELL by 16% in its latest quarter relative to the year earlier.

    However, I do agree with your point about being respectful to one another in the comments section. We're all Fools. Let's get along, even when we don't agree.

  • Report this Comment On November 18, 2010, at 5:45 PM, noirblood wrote:

    retin52,

    I just checked comScore and found the following:

    -Total Unique Visitors to Classmates.com Sites

    decreased 42.4% YoY since Oct 2009. Meanwhile, the total internet audience in the US has grown 7% in that time. Classmates.com sites reached just over 8 million users last month (Facebook reached over 151 million users last month, up 55.2% YoY).

    - Total Time Spent (Minutes) to Classmates.com Sites decreased 65.89% YoY since Oct 2009. Meanwhile, the total time spent on the internet in the US has grown 11.8% in that time (Facebook is up 138.6% YoY).

    - Total Page Views (which directly translate into ad impressions and thus revenue) to Classmates.com Sites decreased 67.18% YoY since Oct 2009. Meanwhile, the total page views on the internet in the US has grown 9.6% in that time (Facebook is up 95.5% YoY).

    That doesn't quite sound like a growth opportunity to me. In fact, the site's traffic pattern has followed the following linear trend equation over the last year: y = 14,187,000 + -397,320x. In other words, that means the site is losing on average 400 thousand unique visitors per month over the last year. At that rate, the remaining paltry traffic will be cut in half by August 2011, and then in half again by January 2012.

    Meanwhile, Facebook is growing its audience by an average of 4.7 MILLION users per month over the last year. This would project them around 198 million users by August 2011, and then 222 million by January 2012.

    Certainly I'm willing to accept the possibility that Facebook's growth slows, but you must be equally willing to accept the possibility that Classmates decline accelerates.

    Oh, and they may have changed the site since 1999, but it certainly still looks like a click farm.

  • Report this Comment On November 18, 2010, at 7:54 PM, retin52 wrote:

    TMF... revenues fell moderately from a tremendous year ago quarter - TRUE. Actually, this was the first decline I believe, and was due to yearly contract expirations that management preannounced. How do revenues compare with 2 yrs ago? 3 yrs? 5 yr - Twice what they are today!

    noirblood... You have your definitions confused I think. Monthly uniques visiting the site are not falling as you say. Check your sources.

    Compare apples to apples. Facebook and Classmates serve a different audience. Classmates is the company we are discussing here, not Facebook.

  • Report this Comment On November 18, 2010, at 9:38 PM, larrybandsull wrote:

    Several of you Classmates bashers are clearly here to promote an agenda that is false. Your attempt to manipulate the stock price will not work, however. It is known that small-cap companies are vulnerable to these smear campaigns, but it is foul of you to promote your selfish interest in Facebook's future in this forum. Good day.

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