Shorting Zuckerberg

Jorgé's picture
Rank: Neanderthal | banana points 2,124

Ahhh, Facebook. Perhaps the biggest thing ever made since sliced bread. I'm on it, you're on it, we're all on it.

With over half a billion active users worldwide, it's become more popular than porn and has a lifted an awkward, freckled, little nerd (obvious envy seeping) to the Forbes list, with a net worth of $ 6.9 billion last year.

Not to mention TIME's Man of the year.

With Goldman's private offering valuing Facebook at $50 billion, they pretty much doubled his net worth and assures a future IPO.

But is Facebook really worth $50 billion to you?

Let's look at the facts; well, what we can estimate anyway.

"The company, based in Palo Alto, Calif., earned $355 million on $1.2 billion in revenue during the first nine months of 2010."

Annualized that'd be roughly $473 million in earnings for the year, and at a $50 billion valuation, that'd make its P/E ratio around 106.

Hmmm... Seems a tad bit high.

That said, an analyst sees that there's still a lot of profit potential in FB, and has even predicted that its value could go as high as $200 billion in 2015.

In that case, it looks like nothing's going to stop Zuckerberg and Facebook from conquering the world.

But wait, wasn't it the same with MySpace?

I was on it, you were on it, hell, most of the world was on it too. MySpace was just as unstoppable as Facebook a few years back, it spewed out sordid "MySpace celebrities", making Indie bands and the likes of Tila Tequila household names yet today, who knows what happened to Todd? Or was it Tim? Tom?

Same with AOL.

And to a lesser (perhaps far, far, lesser) degree, Friendster.

Now, what I ask you is, is Facebook really here to stay?

Will it break the mold and become a massive cash cow in the future?

Or will you short it if you could?

Granted, it's the biggest marketing tool today and it's riding a whole lot of sentiment with every Tom, Dick, and Harry wanting in on it that it'd be stupid not to ride it's tails for awhile.

But for some reason, if I could, I'd much rather be long Twitter.

Comments (44)

Jan 11, 2011

Atrocious analogies - Facebook has power as a platform that will persist into the next decade.

Read into its strategic vision and operational capabilities and you'll begin to understand the potential.

Don't have enough time to tear this post down, but I'm sure other posters will.

Jan 11, 2011

I call bullshit. Facebook has ten times the membership that myspace ever had, and, unlike myspace, people outside the 14-28 age range actually have facebook accounts (were your parents on myspace? no.). There's a huge difference between being making a ton of money and being integral to people's everyday lives. I think it's overvalued at $50 billion until it proves that it can monetize its product to a much greater degree, but it's not a flash in the pan.

I thought the Time POY article was seriously over the top, but facebook has changed the way people interact with one another. It's about as much a fad as the cell phone.

Jan 11, 2011

not yet to much mom and pop investors wanting in on it

Jan 11, 2011

Sacred cow

I want beef

Jan 11, 2011

Facebook destroyed myspace. FB will be something we live with for a very long time.

Jan 11, 2011

The thing is, AOL / AIM / MySpace did not evaporate because of a reduction in the demand for a social networking platform.

Jan 11, 2011

wait till it goes PUBLIC

Jan 11, 2011
Jorge:

Annualized that'd be roughly $473 million in earnings for the year, and at a $50 billion valuation, that'd make its P/E ratio around 106.

Hmmm... Seems a tad bit high.

Just to play devil's advocate here, I imagine Amazon's P/E ratio used to be a lot worse (considering the years where they had negative earnings). So, I guess people expect their earnings to increase a good deal over the next several years, right?

Jan 11, 2011

FB is not worth $50bn
1) Assuming $2bn rev in 2010 (aggressive estimate), they're still at 25x revenue. Google trades at ~5-6x. To be in that range, FB would need to raise their revenue 5x. Right now, they probably have about 600mm members. Let's be aggressive and say they could double their user-base to 1.2bn (out of 2bn worlwide users). Even with this, they would still need to be able to get 2.5x as much revenue from each user. Hardly an easy feat.

2) Why are some people trying to sell FB?
-an early shareholder sold his entire stake in FB because he said the valuations were getting crazy (after they got to a $50bn valuation. These are sophisticated investors and VCs we're talking about, they don't need the money / an exit right now, especially if they really think FB is worth that much

3) Goldman investing at $50bn means nothing
-They're going to make money by selling for more than they bought (that's a no-brainer)
-They're going to convince the market that it's actually worth $50bn (GS is smart, they don't make mistakes)...
-however, GS has been wrong before (GS invested $100mm in Webvan which eventually went bankrupt
-GS puts themselves in the lead for FB's potential IPO
$450 / 50,000 = .9% of company bought
Assuming FB sells 20% of company for $10bn and GS IPO fee is 2%, that's $200mm. Assume they get half of this, because they'll be lead on the IPO
-$450 - 100 = 350
350 / .9% = $39bn valuation

Could go on, but I feel like this topic has been beaten to death already

BossMode

Jan 12, 2011
sick_willy:

FB is not worth $50bn
1) Assuming $2bn rev in 2010 (aggressive estimate), they're still at 25x revenue. Google trades at ~5-6x. To be in that range, FB would need to raise their revenue 5x. Right now, they probably have about 600mm members. Let's be aggressive and say they could double their user-base to 1.2bn (out of 2bn worlwide users). Even with this, they would still need to be able to get 2.5x as much revenue from each user. Hardly an easy feat.

2) Why are some people trying to sell FB?
-an early shareholder sold his entire stake in FB because he said the valuations were getting crazy (after they got to a $50bn valuation. These are sophisticated investors and VCs we're talking about, they don't need the money / an exit right now, especially if they really think FB is worth that much

3) Goldman investing at $50bn means nothing
-They're going to make money by selling for more than they bought (that's a no-brainer)
-They're going to convince the market that it's actually worth $50bn (GS is smart, they don't make mistakes)...
-however, GS has been wrong before (GS invested $100mm in Webvan which eventually went bankrupt
-GS puts themselves in the lead for FB's potential IPO
$450 / 50,000 = .9% of company bought
Assuming FB sells 20% of company for $10bn and GS IPO fee is 2%, that's $200mm. Assume they get half of this, because they'll be lead on the IPO
-$450 - 100 = 350
350 / .9% = $39bn valuation

Could go on, but I feel like this topic has been beaten to death already

Now I know we are back in the tech bubble: comps valuations. Listen: if we throw in linkedin, friendster, and mysquare I am sure we can drag down FB's multiple even more.

Jan 12, 2011
sick_willy:

FB is not worth $50bn
1) Assuming $2bn rev in 2010 (aggressive estimate), they're still at 25x revenue. Google trades at ~5-6x. To be in that range, FB would need to raise their revenue 5x. Right now, they probably have about 600mm members. Let's be aggressive and say they could double their user-base to 1.2bn (out of 2bn worlwide users). Even with this, they would still need to be able to get 2.5x as much revenue from each user. Hardly an easy feat.

I'm glad someone's doing some numbers here. I'm coming to a slightly different conclusion though.

Google is at 5-6x revenue, Facebook is at 25x revenue. However, Facebook is still in a structural growth phase of both its users and its ARPU (they are still learning to monetise their userbase). Facebook has managed to increase revenues about 2-2.5x per year for the past 2-3 years, during a period in which users were growing at a rapid - but not quite 2-2.5x - pace. So ARPU is increasing. A quick look at the numbers:

FB volumes: http://roymorejon.com/facebook-hits-half-a-billion... FB revenues: http://www.allfacebook.com/chart-facebook-revenue-...

Quick calcs show that ARPU has increased from ~$2.3/user to $4/user from 2008 - 2010. (using Revenues $M of 265, 700, and 2000 and avg users M of 115, 275, and 500)

Assuming FB has headroom for another 500M in users (topping out at 1B), FB would have to increase its ARPU by 2.5x to justify a $50B valuation. Ambitious, but within the realm of the possible given FB's monopoly on a business model that is still in its infancy. FB are innovating like crazy right now, trying to find new revenue models to stick onto their very sticky userbase - it won't take too many of these to stick for them to dramatically increase their still very low ARPU.

ARPU by site: http://www.webanalyticsworld.net/2011/01/revenue-p...
I'd call it a risky bet for any investor, but not a crazy one, and with significant upside potential.

(I realise I've done this on revenue and not profit, but at 25% profit margins already - similar to Google's - and a very small employee/revenue ratio, I'm going to assume FB will have no problem remaining a high-margin business)

Jan 11, 2011

Has anyone thought about the idea that the rapid growth in users for FB will dramatically decrease in the coming years. At this point, I don't know very many people that don't have facebook and I don't know a single human being, no matter how old, poor, or stupid, that doesn't know it exists. There are only 2bn internet users on earth. They already have a ~25% market share and, though I know populations grow, there is no way that this kind of growth is sustainable. I also feel like firms that use FB for advertising are close to maximized at this point too.

Just playing devils advocate...

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Jan 11, 2011
happypantsmcgee:

Has anyone thought about the idea that the rapid growth in users for FB will dramatically decrease in the coming years. At this point, I don't know very many people that don't have facebook and I don't know a single human being, no matter how old, poor, or stupid, that doesn't know it exists. There are only 2bn internet users on earth. They already have a ~25% market share and, though I know populations grow, there is no way that this kind of growth is sustainable. I also feel like firms that use FB for advertising are close to maximized at this point too.

Just playing devils advocate...

I don't know how huge facebook is in other countries, but I'd have to think it's bigger here than just about everywhere else. I don't think it'll get too much more popular here, but it might be able to overseas.

Jan 11, 2011

FB is overvalued but I just dont see how they could be knocked off. The demand for social networking sites will always be there.

The only thing that can really destroy them is if they start doing Myspace type gimmicks like allowing music videos on pages and allowing ppl to customize their pages OR doing something absolutely crazy like charging a fee!

Jan 11, 2011

Facebook won't IPO. Its not about money. Its about vision. This whole move is a way for FB to get some cash to hire top talent or do small acquisitions if need-be.

Jan 11, 2011

realisitcally unless facebook starts charging users, which they have vehemently denied they will, I just don't see how they will be able to prove on paper they are worth that valuation. With that being said, somehow I think that GS will either find a way to make people believe Facebook is worth that much, or they wont... But, wouldn't FB going public be against Zucks... way of thinking?

The answer to your question is 1) network 2) get involved 3) beef up your resume 4) repeat -happypantsmcgee

WSO is not your personal search function.

Jan 11, 2011

Facebook murdered Myspace for a lot of reasons. I think for Facebook to maintain it's status as THE social network, it needs to stay a social network. Myspace you saw a lot of clutter with flashy ads, crazy amounts of apps, add-ons, and the ability to code your own homepage which would be filled with useless quizzes and GIF images of just about anything you can think of.

Facebook is doing a great job by keeping it clean and simple which satisfies everyone over the age of 16+. I don't see the benefits of Facebook making crazy amounts of money. The balance between the clean vs clutter would be outweighed by the ads, companies like Zynga pushing 3rd party applications on people and maybe even a membership fee would cause a loss of people coming in.

Facebook can maintain a healthy balance by not getting to far ahead of themselves.

"There's no such thing as a normal life, Wyatt, there's just life." --Doc
Holliday, Tombstone, 1993

Jan 11, 2011

One place where Facebook isn't huge is in mainland China, because the government blocks it. However they have a Chinese social networking site with an uncanny similarity to Facebook (http://renren.com). I think it will be interesting to see what route Zuckerberg takes with China, considering the way things with Google have played out.

Jan 11, 2011

If Facebook can find a way to increase advertising revenue, it could be justified because I don't see the need of people to use social networking to decrease. Facebook isn't that big in Asia, where, amazingly, Friendster dominates. Let's say they double their user base to 1.2bn, so their earnings would be just short of $1bn, (could be higher if they find ways to cut costs/charge higher revenue due to increased site traffic). That is still a 50x P/E (assuming "earnings" that were stated was EBITDA). Seems a bit high, but I would hope they can increase the data mining revenue/advertising revenue in the future.

Reality hits you hard, bro...

Jan 11, 2011

@ Libor, they already said they'd either go public or disclose financial data. My guess is an IPO, which doesn't look attractive from an investment standpoint. See the Zweig article in WSJ couple days ago, "Why the Fuss over Facebook Doesn't Make it a Homerun."

I just think something could easily happen to supplant FB as the THE social network, just like they did to Myspace. Consumer trends in social networking change faster than arguably any other industry. That said, anything with 500mm users is obviously something people care about, so we'll see in the next few years.

Happypants is on to something with number of global internet users and consequential growth rates in number of users. In any tech startup, user growth is the most important projection. So what's the projection for FB? How quickly will the number of global internet users grow?

More questions than answers for me from an investing standpoint on this one

If anything, if Zuckerburg really is drinking his own kool-aid, he'll keep it as an outlet, not an investment. "social revolution" and all that jazz should free him from worrying about the bottom line, no?

Jan 11, 2011
Old Major:

@ Libor, they already said they'd either go public or disclose financial data. My guess is an IPO, which doesn't look attractive from an investment standpoint. See the Zweig article in WSJ couple days ago, "Why the Fuss over Facebook Doesn't Make it a Homerun."

I just think something could easily happen to supplant FB as the THE social network, just like they did to Myspace. Consumer trends in social networking change faster than arguably any other industry. That said, anything with 500mm users is obviously something people care about, so we'll see in the next few years.

Happypants is on to something with number of global internet users and consequential growth rates in number of users. In any tech startup, user growth is the most important projection. So what's the projection for FB? How quickly will the number of global internet users grow?

More questions than answers for me from an investing standpoint on this one

If anything, if Zuckerburg really is drinking his own kool-aid, he'll keep it as an outlet, not an investment. "social revolution" and all that jazz should free him from worrying about the bottom line, no?

Disagree with you here. They certainly will reveal their financial information, but not do an IPO. This is consistent with their corporate vision. The firm believes in internet transparency. Read any extensive interview with Mark and you will see he a) he doesn't care about money, as he still rents a place he found on craigslist and drives the same acura he has had for years b)he believes in complete transparency on the web. Thus, sharing financial information would be consistent with this vision (This isn't some new idea either. Take a look here: http://manvsdebt.com/finances/ People online realize that sharing finances is a great way to set and keep financial goals and allow others to point out areas for improvement)

The whole game is changing. Leading firms in technology today look at past leaders and see that IPO's sent them awry. Look at Steve Jobs. Can you deny that he has vision? Has he not brought innovative products to market? Was there not a fifteen year period between the introduction of the first few Apple computers and revolution of the ipod/iphone/ipad. Steve had vision. His board of directors did not. Unfortunately, his IPO was a costly mistake which delayed that process.

The same is true of facebook, twitter, and other new technology firms. Why go public when second market exists for employees to cash out?

As for everyone else, you cannot just assume that advertising revenue is the only possible source of revenue for facebook. Their are probably ways to monetize this project in ways that we cannot possibly conceive. The world is dynamic, and just because ad revenue is the driving force behind google doesn't mean it will be the same for facebook.

Jan 11, 2011
<span class=keyword_link><a href=//www.wallstreetoasis.com/finance-dictionary/what-is... rel=nofollow>LIBOR</a></span>:

Their are probably ways to monetize this project in ways that we cannot possibly conceive. The world is dynamic, and just because ad revenue is the driving force behind google doesn't mean it will be the same for facebook.

An elementary, yet profound point. Anybody want to take some guesses at how they could try to monetize FB?

Jan 12, 2011

I think that it is widely agreed that FB is overvalued at 50 Billion. However, the true question that remains is whether or not FB could actually reach the prediction. The largest problem I see with FB is continuing the growth of their market share because....
1. Despite the talks of overseas expansion, FB already has a ridiculous market share that will be difficult to not only grow but maintain.
2. The market segment that started this phenomenon (aka 16-24yrs) could easily move to the next social networking site that comes along. The reason, because they don't want to be on the same site as their parents.
3. FB will face problems commercializing the site and making more profit without charging a fee or instituting ads (or new layouts with ads) that piss people off.

Jan 12, 2011

Personally I think facebook is way overvalued. Unlike google, where I actually go to seek out information and thus click through to paid adds, with facebook I'm going to zone out. Facebook is like the steve clancy novel of the internet. Its a place to decompress and nothing else. I never have nor never will click through to ads on facebook. I don't give a shit about the questions and will never use facebook to seek information. I'd imagine that the majority of people are like me in this regard. Hence, I don't care how many users you have if people aren't clicking through to adds you aren't gonna get paid, impression based advertising is bottom of the barrel.

Jan 12, 2011

$50 billion is a ridiculous valuation. I haven't seen anything this crazy since the late 90's. I recently deleted my account due to privacy concerns and because I don't like to reconnect with people I never really cared about in the first place. Friends and family have my cell phone number.

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.

-Niccolo Machiavelli

  • vanillathunder12
  •  Jan 12, 2011

I have heard the new trend is for companies to pay celebrities for 1 day of their status. So Nike would pay Lebron $2mm for his status to be "Just got my new Nikes today and they are [email protected]!". Facebook gets $0.

Jan 12, 2011

Facebook might be far undervalued in the long run. Look, Facebook isn't stopping at Facebook. They are in the process of creating their own Facebook cell phone and maybe even tablet PC. There are talks that Facebook could one day be your Internet browser. With the incredibly popular business models of Groupon, LivingSocial, etc. nearly entirely integrated into Facebook, with Twitter integrated into Facebook, and with virtually all websites of material concern integrated into Facebook, it's almost impossible to see anything overtaking Facebook. MySpace never even came close to the popularity or widespread usage of Facebook.

I think we can establish this pretty well:

1) Facebook isn't going anywhere anytime soon. It is no more a fad than Google. AIM was a fad, MySpace was a fad, Xanga was a fad, LiveJournal was a fad, netbooks were a fad, and tablet PCs may prove to be a fad (I strongly believe they will). Google, Microsoft (via Office), and Facebook are not fads. They have literally revolutionized electronics and they are integrated into every aspect of the computer and the internet. My MyTough 4G is wholly integrated into a Facebook platform. Its proper and full functionality is predicated upon my having a Facebook and gmail account.

2) We've established that Facebook is not going away, so what next? There will be new revenue sources, whether it's through increased ad fees or through creating its own electronics line or by getting a $500 million contract from the Census Bureau. It will find a way of making money. And once it takes over and fully integrates itself into every aspect of the electronic society, the sky's the limit. For all we know, it could be the platform for a fully electronic currency given its level of integration. The point is, I would not under sell what is happening here with Facebook.

Jan 12, 2011

I think I'm missing something.... should I be as optimistic as this guy^?

Yeah, it's facebook, it's popular... but will it really last as much as this guy is saying? I think facebook has a pretty good future coming but I don't think it's THAT good.

I don't know shit about this kinda stuff though

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

Jan 12, 2011

Don#t you forget guys...

it takes 10 seconds to come up with improvements,
it takes 1 day to write a business model around it
it takes one week to recode facebook (given 100 fancy disposable Indians working 24/7/7 before heart-attack)
and only some smart migration technology that uses the user's legal right to withdraw his content,

and puff facebook is dead.

As a matter of fact, it requires people only to recognize that having a coffee or a phonecall is more amusing, and cut 20 minutes of user time time daily, and you have revenues dropping to half. ^^

"Make 'Nanas, not war! "

Jan 12, 2011
Jerrey:

Don#t you forget guys...

it takes 10 seconds to come up with improvements,
it takes 1 day to write a business model around it
it takes one week to recode facebook (given 100 fancy disposable Indians working 24/7/7 before heart-attack)
and only some smart migration technology that uses the user's legal right to withdraw his content,

and puff facebook is dead.

As a matter of fact, it requires people only to recognize that having a coffee or a phonecall is more amusing, and cut 20 minutes of user time time daily, and you have revenues dropping to half. ^^

wikipedia network externality

Jan 12, 2011

No one can deny that facebook has a tremendous amount of hits and that the people that log on to facebook spend an exceedingly high amount of time on the website compared to some others (including google).

I also think the debate about whether facebook will be around for a long time is silly. People that say myspace came and went are missing the point. Myspace went away because it had security issues that it's more sophisticated offspring seems better equipped at handling. Social networking has become steadily more popular and relevant since its birth and fulfills the basic human need to feel connected, so I think theres a good chance its here for a while.

While all this is true, facebook is still WAY overvalued. Heres why they aren't making money now and why they are going to have trouble making money in the future:

People log on to facebook to connect with friends, creepily stalk pictures, and find out information about contacts. People go to google to find things; products, restaurants, services, business, etc. Google has an implicit advantage in advertising revenue because of the nature of what it does. The reason that I've never clicked on an ad on facebook is because no matter how sophisticated it's specified ad placement algorithm is, I'm logging on to check out the slut from my math class or chat with someone I haven't talked to in a while. i could care less about the discretely placed ad on the side of the page. If I want to find something an advertiser is peddling, I type google.com into my web browser, and thats how it will be for a long time. Ultimately facebook needs to find a way to turn visits to facebook.com into visits to advertisers sites, and while they can certainly improve in this realm, I don't think it will be enough to justify the absurd revenue growth this valuation implies.

Jan 12, 2011

YOu refer to critical mass treshhold for a hype?

Just imagine you have written a one-to-one copy of facebook, and you got all the subcontractors such as farmville etc on your side allowing a simple merge.

Then you get at the users and say: I pay you ten bucks if you merge, and 1 buck for everyone you can make merge with you , and even more if he is willing to give you some of th 10 bucks he is receiving for joining.

WHy would you do that? Well, ...
a) blabla probability that 90% of the people of facebook you have as friends, and ...100% of the people you like and have contact with on facebook come to our site..

b) we don't spy on you, better security issue and very very sophisticated anti-spam and anti-mobbing protection with serious prosecution of children that do mob..or something like that..

c) you can now play farmbille in you iphone extension and manage multiple farms in one

d) it is even easier to use.. bla

Whatever works...
Once you got the goats in, you made a fortune shorting facebook , and you can start building measures to protect such a migration. (facebook doesn't really have one right now, you would probably need some module that converts the page into non-html format code, but that can be navigates as html format, but which is exentially an strange image that your neural networks cannot decode ...making the merging process too costly. )

And NOW you start abusing their privacy, shooting ads on their iphone screen, and making sure you know their move before they do .

So where eactly is the problem with network externality? ^^

...It is similar to a leveraged buy out, isn't it. You use the assets of the acquired company as a security,
and here you simply usethe gains from shorting the opponent to pay for the migration. Eventually you should even make extra money, because the amount you pay for each customer is at best his worth now and in the coming three months, but the facebook valuation is valuing further into the future. I don't know the stats exactly though.

"Make 'Nanas, not war! "

Jan 11, 2011

Random Question: If you guys owned FB, what would you do? Keep running it? Sell it? If you sold it, what would you do?

Talk is cheap, but nevertheless, I like to think I'd sell off my 1/4 ownership if I was Zuckerberg. If you're already loaded, I'd have a little fun and start a new business, or a hedge fund or something. If I was a billionaire, I'd just do something completely new and random every 5 years: start a new business, start a hedge fund, start a VC, play high stake poker, trade, start a non-profit, etc.

Jan 12, 2011

Facebook will stay around, but increasingly confront contentious privacy issued while trying to increasingly monetize its platform.

I am more concerned about other companies such as Zynga. In my opinion I dont see how people can value a company at 5-6 bn that undermines the productivity of people. Farmville and all of the other games are completely useless and are an excuse for people to slack off during the day. The government should shut it down completely or else the U.S. will quickly become a bunch of mindless potatos.

Jan 12, 2011

FB won't be a short until momentum runs out (a year or two after going public perhaps?) and there's an off-chance Zuckerberg manages to expand the site in a more lucrative direction, but a PE of 106 is never justified (just looked at what happened to Amazon). Comparisons with Myspace are ridiculous though as is the idea that Twitter has better prospects.

Jan 12, 2011

"Goldman Sachs Capital Partners -- a group that manages and invests for pensions, sovereign wealth funds and other prominent clients -- was given the initial opportunity to invest $450 million in Facebook, said the people, who were not authorized to speak publicly on the matter.

Goldman gives the "first look" on many investment opportunities to the $20.3 billion fund. While most of the group's clients are big institutions, the investors also include current and former Goldman partners.

But the unit's head, Richard A. Friedman, a longtime Goldman partner, decided the Facebook deal was not suitable for his clients, in part owing to the high valuation and to a mismatch with his investment criteria. The $450 million investment values the Web company at $50 billion. After Goldman's deal, some industry experts cautioned that Facebook's growth would need to accelerate rapidly over the next couple of years to justify such a steep price -- a risk with many brand-name technology upstarts."

http://www.ndtv.com/article/technology/goldman-onc...

Jan 11, 2011

Random question: If everybody thinks that the valuation exaggerates the "true" value, then what's the point of a valuation in the first place? It kinda reminds me of all the fuss about credit ratings. If enough people think the credit ratings (or FB valuation) are bogus, then the "true" number should come out. For example, my buddy in a Finance PhD program was telling me about this research paper on the credit ratings, where it seems like the default risk was priced into fixed income securities, despite the faulty credit ratings. As he put it, "There's been a lot of fuss about rating agencies and the crisis. But if everybody took the credit ratings so seriously, then they'd make price decisions solely based on the credit ratings and go home early. But, of course, that's not what money manager do, and you can see it when you look at the data." Anyway, I'm not trying to get in a long discussion over rating agencies -- my simple point is that everybody seems to know the FB valuation is bogus, so what's the point? It seems that you guys (and probably stakeholders, in general) all have some idea about what FB should be valued at, so why does it matter if GS gives FB a P/E ratio of 1, or a P/E ratio of 250?

Jan 12, 2011

Maybe so-called goodwill is the reason the valuation is so high in the sense that its income at this point may not justify such a valuation but the very fact that it will have its hands into every corner of the electronics world make its very brand--its very codes--incredibly valuable, kind of like a condo in Manhattan may not cash flow and may have terrible "cash flow investment" value but its very existence and "potential"--potential to appreciate, potential to put you in the middle of the greatest night life in the world, potential to get you pus*y, the potential to get you "friends", the potential to give you a great commute--give it its value.

Jan 12, 2011

Aswath Damodaran

"One of the biggest stories of the last week was Goldman's $ 500 million investment in Facebook for approximately 1% of the company. Extrapolating from the transaction, we obtain an implied value of $ 50 billion for Facebook, a number that has been making the rounds in news stories over the last few days. There are three questions that emerge from this news story: (a) With private businesses, can you extrapolate from a single transaction amount to an overall value? (b) Why would a company worth billions choose to stay private, when it clearly has the option to go public? (c) How would you value a share in a non-listed, non-traded company (as opposed to a publicly traded company)?

a. Can you extrapolate from a single transaction amount to an overall value?
Sure, as long as the transaction is an arms length one and all you are getting in return for your investment is a share of the company's equity. If, as is common, there are side benefits or side costs that go with the transaction, extrapolation will yielding a misleading estimate of value. In the case of the Goldman transaction, there are plenty of reasons to be skeptical. In addition to getting a piece of Facebook, Goldman also gets the following benefits:
a. Investment opportunities for Goldman's clients: As part of the deal, Goldman will be raising $1.5 billion from its clients to invest in Facebook. While this may seem to be a favor that Goldman is doing for Facebook, the reality is that Facebook is a hot company to invest in and this will allow eager investors an exclusive entree into the company.
b. A front seat for the Facebook IPO: If at some point in time, Facebook decides to go public, Goldman is likely to be the lead underwriter and reap a big share of the commission.
c. Private wealth management services to Facebook's potential billionaires and millionaires: When Facebook goes public, Mark Zuckerberg and a number of other executives will have the capacity to sell their shares in the market. While I do not expect a wholesale cashing out of equity positions immediately after the IPO, it is likely to happen over time, at which point these very wealthy individuals will need some private banking help and Goldman will be there to provide that help.
The profits and fees from these added businesses could account for a significant chunk of the $ 500 million that Goldman paid in this transaction. Exactly how much will depend on the likelihood of an IPO and the fee structure for the transaction. If, for instance, the present value of the expected fees from these side benefits is $ 200 million, the implied value for Facebook will be $ 30 billion, rather than $ 50 billion.
One more note of caution. Strange though this may sound, I would trust a market price derived from a consensus of a thousands of buyers and sellers to get the value right more than I trust the price from a single transaction, even if the buyer and seller are supremely sophisticated.

b. Why would a company worth billions choose to stay private, when it clearly has the option to go public?
Facebook's reluctance to go public may seem surprising. After all, the conventional wisdom has always been that companies like Facebook should get a more favorable response from offering shares in the public market place than from private offerings to venture capitalists and large investors. Here are some reasons, rational or otherwise, for why Facebook may be holding back:
i. Extending the tease: Looking at the favorable publicity that Facebook has got in the last week from the Goldman deal, it does not look like waiting to go public is hurting Facebook, at least for the moment. In fact, it may be making Facebook an even more desirable investment to those who cannot invest in it right now.
ii. "Proprietary" information: While I don't think that this is a big factor for Facebook, there are some companies that choose to stay private because they are afraid of revealing proprietary information about their products/services to the general market. Instead, they can provide the information, with sufficient restrictions on disclosure, to a few wealthy investors who can then invest in the company.
iii. Founder idiosyncracies: If the founder and majority stockholder in a company decides that he does not want the company to go public, the company will not go public. In the case of Facebook, it is entirely possible that Mark Zuckerberg has decided that he does not want to take the company public and he does not seem the kind of person who can be dissuaded easily.
iv. Regulatory and information disclosure concerns: From Sarbanes-Oxley to SEC restrictions, public companies are constrained in ways that private businesses are not.
v. No valuation scrutiny: As a publicly traded company, no matter how well regarded it may be, the market valuation will be questioned by skeptical investors. Scaling value to earnings or book value, investors will argue that the company are over priced, relative to other companies in the market. (Take a look at Apple, Google and Netflix, all big winners over the last year, and you will see this phenomenon at play). Facebook gets to have the best of both worlds, again at least for the moment. We get glimpses of its immense value, each time a transaction is made, and no real way to examine whether the value makes sense, since we do not have access to much of the information we need.
In summary, Facebook is in a unique position. It has the profile to raise capital from wealthy investors are favorable terms and is getting many of the benefits of being a publicly traded company without any of the costs. Could that change? Absolutely. If there is bad news (or even rumored bad news) about the company and some or even a few investors have trouble exiting the company, the estimated value could melt down quickly.

(c) How would you value a share in a private company (as opposed to a public company)?
Let's assume that you are one of those lucky investors that has a chance to invest in Facebook. How would you go about valuing the company?
i. Financial data: You have to get your hands on some operating numbers. All you have right now is rumor: Facebook supposedly will generate $ 2 billion in revenues this year and there is no word on how much earnings they will have. You cannot value a company based upon information that is this threadbare and you will need fuller financial statements.
ii. Future projections: Once you have the information, you have to make projections for the future, valuing Facebook just the way you would value any young, high growth publicly traded company. I have a paper on the topic. Normally, with private businesses, you will discount the value for lack of liquidity but I don't think this is a concern with Facebook shares, even if privately held.
iii. Ownership protections: I don't know about you but I just finished watching Social Network, the movie, and I am not sure that I feel secure that my ownership rights will be protected by the controlling stockholders at Facebook. I would need to make sure that there are enough protections in place for existing stockholders in the event of new capital being raised or an IPO.

So, is Facebook worth $ 50 billion? Based upon current revenues of $ 2 billion, it is richly priced; 25 times revenues and god only knows how many times earnings. The justifications that I hear from analysts for the high valuation are:
(a) An unprecedented platform: The 500 million users provide a platform that could generate much higher revenues and earnings in the future, but a lot of things of things have to go right for this to work out. I am not a big user of Facebook, but my gut feeling is that an overt commercialization of the space will make it less attractive to many users. So, it has to be subtle and creative commercialization... while fending off competition. (Remind me again what happened to Myspace, another hot place to be not so long ago).
(b) Goldman knows best: Smart investors (like Goldman) think its worth $ 50 billion. So, it must be worth $ 50 billion. This line of reasoning is so absurd that it is not worth pursuing. If you think that Goldman does not make big valuation mistakes, you are wrong. What Goldman does well is cut its losses, if it does make mistakes. You and I will not have that option.
(c) The Big Story: To those who use the big story justification, everyone will be on a social network in the future, and you need to pay a premium to be part of the movement. Having heard variants of the big story before used to justify other bubbles (dot com, telecomm, PCs), I don't buy this. I think the market may be right about the macro story but is being hopelessly over optimistic about the micro pieces. In other words, we may all be parts of social networks a decade from now, but can all of these social networking platforms (Facebook, Twitter, Groupon...) be profitable? My guess is that there will be a few big winners and lots of losers, before the final story is written. (Remember that the market was right in 1998 about dot-com retailing being the wave of the future but most dot-com retailers never made it through to nirvana. Amazon did and it is worth almost $ 80 billion, but it is the exception.)"

Jan 11, 2011
BonsaiBanker:

Aswath Damodaran

"One of the biggest stories of the last week was Goldman's $ 500 million investment in Facebook for approximately 1% of the company. Extrapolating from the transaction, we obtain an implied value of $ 50 billion for Facebook, a number that has been making the rounds in news stories over the last few days. There are three questions that emerge from this news story: (a) With private businesses, can you extrapolate from a single transaction amount to an overall value? (b) Why would a company worth billions choose to stay private, when it clearly has the option to go public? (c) How would you value a share in a non-listed, non-traded company (as opposed to a publicly traded company)?

a. Can you extrapolate from a single transaction amount to an overall value?
Sure, as long as the transaction is an arms length one and all you are getting in return for your investment is a share of the company's equity. If, as is common, there are side benefits or side costs that go with the transaction, extrapolation will yielding a misleading estimate of value. In the case of the Goldman transaction, there are plenty of reasons to be skeptical. In addition to getting a piece of Facebook, Goldman also gets the following benefits:
a. Investment opportunities for Goldman's clients: As part of the deal, Goldman will be raising $1.5 billion from its clients to invest in Facebook. While this may seem to be a favor that Goldman is doing for Facebook, the reality is that Facebook is a hot company to invest in and this will allow eager investors an exclusive entree into the company.
b. A front seat for the Facebook IPO: If at some point in time, Facebook decides to go public, Goldman is likely to be the lead underwriter and reap a big share of the commission.
c. Private wealth management services to Facebook's potential billionaires and millionaires: When Facebook goes public, Mark Zuckerberg and a number of other executives will have the capacity to sell their shares in the market. While I do not expect a wholesale cashing out of equity positions immediately after the IPO, it is likely to happen over time, at which point these very wealthy individuals will need some private banking help and Goldman will be there to provide that help.
The profits and fees from these added businesses could account for a significant chunk of the $ 500 million that Goldman paid in this transaction. Exactly how much will depend on the likelihood of an IPO and the fee structure for the transaction. If, for instance, the present value of the expected fees from these side benefits is $ 200 million, the implied value for Facebook will be $ 30 billion, rather than $ 50 billion.
One more note of caution. Strange though this may sound, I would trust a market price derived from a consensus of a thousands of buyers and sellers to get the value right more than I trust the price from a single transaction, even if the buyer and seller are supremely sophisticated.

b. Why would a company worth billions choose to stay private, when it clearly has the option to go public?
Facebook's reluctance to go public may seem surprising. After all, the conventional wisdom has always been that companies like Facebook should get a more favorable response from offering shares in the public market place than from private offerings to venture capitalists and large investors. Here are some reasons, rational or otherwise, for why Facebook may be holding back:
i. Extending the tease: Looking at the favorable publicity that Facebook has got in the last week from the Goldman deal, it does not look like waiting to go public is hurting Facebook, at least for the moment. In fact, it may be making Facebook an even more desirable investment to those who cannot invest in it right now.
ii. "Proprietary" information: While I don't think that this is a big factor for Facebook, there are some companies that choose to stay private because they are afraid of revealing proprietary information about their products/services to the general market. Instead, they can provide the information, with sufficient restrictions on disclosure, to a few wealthy investors who can then invest in the company.
iii. Founder idiosyncracies: If the founder and majority stockholder in a company decides that he does not want the company to go public, the company will not go public. In the case of Facebook, it is entirely possible that Mark Zuckerberg has decided that he does not want to take the company public and he does not seem the kind of person who can be dissuaded easily.
iv. Regulatory and information disclosure concerns: From Sarbanes-Oxley to SEC restrictions, public companies are constrained in ways that private businesses are not.
v. No valuation scrutiny: As a publicly traded company, no matter how well regarded it may be, the market valuation will be questioned by skeptical investors. Scaling value to earnings or book value, investors will argue that the company are over priced, relative to other companies in the market. (Take a look at Apple, Google and Netflix, all big winners over the last year, and you will see this phenomenon at play). Facebook gets to have the best of both worlds, again at least for the moment. We get glimpses of its immense value, each time a transaction is made, and no real way to examine whether the value makes sense, since we do not have access to much of the information we need.
In summary, Facebook is in a unique position. It has the profile to raise capital from wealthy investors are favorable terms and is getting many of the benefits of being a publicly traded company without any of the costs. Could that change? Absolutely. If there is bad news (or even rumored bad news) about the company and some or even a few investors have trouble exiting the company, the estimated value could melt down quickly.

(c) How would you value a share in a private company (as opposed to a public company)?
Let's assume that you are one of those lucky investors that has a chance to invest in Facebook. How would you go about valuing the company?
i. Financial data: You have to get your hands on some operating numbers. All you have right now is rumor: Facebook supposedly will generate $ 2 billion in revenues this year and there is no word on how much earnings they will have. You cannot value a company based upon information that is this threadbare and you will need fuller financial statements.
ii. Future projections: Once you have the information, you have to make projections for the future, valuing Facebook just the way you would value any young, high growth publicly traded company. I have a paper on the topic. Normally, with private businesses, you will discount the value for lack of liquidity but I don't think this is a concern with Facebook shares, even if privately held.
iii. Ownership protections: I don't know about you but I just finished watching Social Network, the movie, and I am not sure that I feel secure that my ownership rights will be protected by the controlling stockholders at Facebook. I would need to make sure that there are enough protections in place for existing stockholders in the event of new capital being raised or an IPO.

So, is Facebook worth $ 50 billion? Based upon current revenues of $ 2 billion, it is richly priced; 25 times revenues and god only knows how many times earnings. The justifications that I hear from analysts for the high valuation are:
(a) An unprecedented platform: The 500 million users provide a platform that could generate much higher revenues and earnings in the future, but a lot of things of things have to go right for this to work out. I am not a big user of Facebook, but my gut feeling is that an overt commercialization of the space will make it less attractive to many users. So, it has to be subtle and creative commercialization... while fending off competition. (Remind me again what happened to Myspace, another hot place to be not so long ago).
(b) Goldman knows best: Smart investors (like Goldman) think its worth $ 50 billion. So, it must be worth $ 50 billion. This line of reasoning is so absurd that it is not worth pursuing. If you think that Goldman does not make big valuation mistakes, you are wrong. What Goldman does well is cut its losses, if it does make mistakes. You and I will not have that option.
(c) The Big Story: To those who use the big story justification, everyone will be on a social network in the future, and you need to pay a premium to be part of the movement. Having heard variants of the big story before used to justify other bubbles (dot com, telecomm, PCs), I don't buy this. I think the market may be right about the macro story but is being hopelessly over optimistic about the micro pieces. In other words, we may all be parts of social networks a decade from now, but can all of these social networking platforms (Facebook, Twitter, Groupon...) be profitable? My guess is that there will be a few big winners and lots of losers, before the final story is written. (Remember that the market was right in 1998 about dot-com retailing being the wave of the future but most dot-com retailers never made it through to nirvana. Amazon did and it is worth almost $ 80 billion, but it is the exception.)"

Jan 12, 2011

Wow, it appears that a 15 year old girl threw monkey shit at everyone who thinks the Facebook valuation is overvalued. I'm sorry for not liking the picture of you and your friends at the party holding red cups, you all looked super cool and popular.

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.

-Niccolo Machiavelli

Jan 12, 2011
Comment

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

Jan 11, 2011