8 ms·

On Facebook v. Ford, in terms of how shareholder value gets built and sustained, yes, the market is being as rational as it ever gets. Consider the following fi

by GCA10 10y ago

On Facebook v. Ford, in terms of how shareholder value gets built and sustained, yes, the market is being as rational as it ever gets. Consider the following five dimensions: CREATING THE PRODUCT: Facebook's engineers provide the framework, but each day's content is created free of charge by 1.5 billion active users. That's great for profit margins! At Ford, cars don't get built unless the company buys steel, glass, tires, etc. and pays workers to put it all together. That really squeezes margins. GENERATING DEMAND: Facebook's users share content and invite their friends to join, at no cost. Media companies beg to play in Facebook's ecosystem. By contrast, Ford needs to spend billions on advertising to get people excited about cars. OBLIGATIONS TO CUSTOMERS: Facebook has a modest-sized fraud and security team that keeps everything tidy. They do heroic work, but there aren't 50,000 of them. At Ford, the requirements for inspections, safety tests, recalls, legal settlements when vehicles go bad, etc. are vastly larger. OBSOLESCENCE: Ford has $58 billion invested in plant and equipment. Every day, those factories get a little closer to being obsolete. Ford must constantly either raise cash or reinvest profits to keep its factories competitive. That means less free cash for shareholders. By contrast, Facebook has just $8 billion invested in server farms, beautiful headquarters, etc. Its asset-maintenance burden is vastly less -- and should stay that way forever. MAKING MONEY: Ford's net income zigzags all over the place, jolted by lots of market/economic issues. Net income was down last year; historically it's ranged from $11 billion to sizable losses. Facebook's net income totaled $3.7 billion last year and is climbing at a very snappy rate. 35% a year? Doubling? Still hard to tell, but it keeps going up. Put all those factors together, and Facebook is a growth stock with a pretty straightforward path to making its business hum. Ford is a cyclical stock that may have already posted its peak profits. Ford may be a bedrock part of the U.S. economy, but that doesn't always get you a lot of love in the stock market, for reasons above. Yeah, Ford has $150 billion in revenue a year and Facebook had just $18 billion. But markets value companies on their growth prospects. I've got no trouble believing that Facebook's overall opportunity to make money is 6x better than Ford's.

lvs 10y ago
Snore. It's just advertising. If internet advertising is overvalued, then SV company valuations are dramatically too high.
- cm2187 10y ago
  Plus advertising aren't exactly the most stable form of revenues in a downturn. Some investors will be in for a harsh awaking at the next bear market.
  - adventured 10y ago
    That very much depends on the context of the ad business in question. What stage it's at in terms of expansion and so on. Google zoomed right through the great recession, growing its advertising business while most businesses were struggling. As far as Google's business was concerned, the great recession hardly happened at all.
- vecter 10y ago
  Google is "just advertising". What's your point?
  - lvs 10y ago
    I made my point. If internet advertising is an overvalued sector of the economy -- which it most certainly is -- then all your favorite companies need new business models. What more do you want to hear?
    - 03pxkexce5 10y ago
      And if cars are overvalued, then Ford needs a new business model. Kind of a tautology there.
      - coldtea 10y ago
        The insight the parent offered though is pointing out the tautology in the former case. Because while everyone knows Ford == cars, lots of people see SV/Google and miss that most of it is in the selling ads business and much less in selling tech.
      - lvs 10y ago
james-watson 10y ago
Great analysis but you left out one major point: Facebook is a monopoly in it's market segment, whereas Ford is one of many fierce competitors. As such, Facebook takes all the profit from social media advertising, and can set its own prices and dictate terms to its customers. Ford can afford to do no such thing. If Ford were the only auto maker in the world, it would be a far more lucrative investment.
duncanawoods 10y ago
Shouldn't this analysis include the level of risk unique to a social network i.e. a usenet/myspace/digg/frendster crash? Businesses that rely on and grow from network effects, die from them too at an even faster rate. A scandal or rival product could take FB to zero. Some would say that history tells us it is FB's inevitable outcome. I know some believe that it can't happen and the FB is "the last social network" but that sounds a little bit like bubble participants claiming "this time its different".
- heurist 10y ago
  They'll switch to business intelligence in that case (like Foursquare). They've got enough data to last them lifetimes.
  - jsemrau 10y ago
    Interesting that you mentioned Foursquare. I considered them a has been for such a long time and only recently realized that they are still around being the geolocation API provider for a bunch of products. Successful pivot, I think.
    - WorldMaker 10y ago
      My assumption was that it was never really a pivot. It seemed that the geolocation API was always their primary strategy. I thought that was why it continues to be odd that so much of Foursquare's usage and network loss seems attributable to their own consumer confusing actions to split out the social network part into a new brand (Swarm) instead of the other way around.
- cheez 10y ago
  They'll keep buying out competitors. It's the smart move.
- jasonjei 10y ago
  If anything, Ford is facing many viable competitors than FB with respect to traditional and EV cars. The warning signs of FB rising were apparent for years, but the News Corp managed MySpace did nothing to curb its rise.
dredmorbius 10y ago
That's a good list, though I'd add a few caveats / contras to it. Your "Creating the Product" and "Generating Demand" elements synergise off one another. Facebook has considerable network effects, and those network effects stimulate content, but break the chain, or boil-off customers (see "The Evaporative Cooling Effect"), and the feedback's strongly negative all the way down. MySpace imploded quite rapidly. Google's G+ had some traction initially, but worked exceptionally hard to drive off its strongest fans. Those who are slower to learn (/me raises hand) are only now being convinced of our error. But "Obsolescence" is the big one. Ford's plant degrades from the inside, and the rate of amortisation of manufacturing equipment is fairly well known. Innovation in automobiles peaked in the 1920s, though it's arguable that there were additional spurts in the 1970s (largely around economy), 1990s (quality and electronic controls), and now a possible shift to hybrid or electric vehicles, though those remain tiny portions of the entire market (highly visible, but still tiny by either unit count or, slightly less so due to much higher per-unit costs, currency marketshare). Ford, along with other US automakers was blindsided when a very modest amount of market innovation, toward more efficient vehicles, hit in the 1970s. That was an exogenous obsolesence function. Facebook and other technologies face this all the damned time. As I've slowly realised, the cost of provisioning technology hardware falls by an order of magnitude per decade. The rate is much slower for software, but there's far more capable, far more modular software rising up all the time. You can actually see this progression going back to the dawn of electronic computing, with IBM owning the market in the 1950s and 1960s, then a cascade of first minicomputers (DEC, Wang, Sun), then micros (PCs), then laptops, now handhelds, coming along at roughly 10-year intervals. Software's taken a while to catch up. Facebook had roughly 1/10 the hardware cost profile of Google (though growth of the Web may have increased that). Scaling out a startup now is largely a solved problem. Revenue model is harder -- but you need far less revenue. The other problem Facebook (and any other tech player) faces is that their own codebase becomes liability. For every table-based desktop site (say, Hacker News), that existing site layout (and perhaps much the technology underpinning it) actively impedes movement to mobile or tablet devices. I've had long arguments with designers of sites who insist on pixel- and point-based font sizing, rather than em and rem, and then screw up with low-contrast sites to boot. (HN's own fonts are barely readable for me on a 10" tablet, and no, mobile extensions don't help.) Further, "Making Money" for Facebook has been exceptionally reliant on both easy-money Federal Reserve policies, and lending and banking regulations favouring Silicon Valley style investments. A tremendous amount of advertising is itself financial services, electronics, and other startups (I'm basing this off of Google's advertisers which I'm familiar with from other sources, but suspect FB's profile is similar). That ads money could well dry up damned quickly. Tech companies have the problem that as the money dries up so does their tech workforce. Look at the salaries reported to have been offered to Yahoo's top tech talent (if you can't offer appreciating stock, you've got to bleed money). Lose programmer interest, and again there's a downward cascade of talent and capabilities, and some of the negative feedbacks start dominating.
nazka 10y ago
It's more than just Facebook the product. Facebook the company made a lot of good acquisitions like Instagram.

by GCA10 10y ago

lvs 10y ago

Snore. It's just advertising. If internet advertising is overvalued, then SV company valuations are dramatically too high.

cm2187 10y ago
Plus advertising aren't exactly the most stable form of revenues in a downturn. Some investors will be in for a harsh awaking at the next bear market.
- adventured 10y ago
  That very much depends on the context of the ad business in question. What stage it's at in terms of expansion and so on. Google zoomed right through the great recession, growing its advertising business while most businesses were struggling. As far as Google's business was concerned, the great recession hardly happened at all.
vecter 10y ago
Google is "just advertising". What's your point?
- lvs 10y ago
  I made my point. If internet advertising is an overvalued sector of the economy -- which it most certainly is -- then all your favorite companies need new business models. What more do you want to hear?
  - 03pxkexce5 10y ago
    And if cars are overvalued, then Ford needs a new business model. Kind of a tautology there.
    - coldtea 10y ago
      The insight the parent offered though is pointing out the tautology in the former case. Because while everyone knows Ford == cars, lots of people see SV/Google and miss that most of it is in the selling ads business and much less in selling tech.
    - lvs 10y ago

james-watson 10y ago

Great analysis but you left out one major point: Facebook is a monopoly in it's market segment, whereas Ford is one of many fierce competitors. As such, Facebook takes all the profit from social media advertising, and can set its own prices and dictate terms to its customers. Ford can afford to do no such thing. If Ford were the only auto maker in the world, it would be a far more lucrative investment.

duncanawoods 10y ago

Shouldn't this analysis include the level of risk unique to a social network i.e. a usenet/myspace/digg/frendster crash? Businesses that rely on and grow from network effects, die from them too at an even faster rate. A scandal or rival product could take FB to zero. Some would say that history tells us it is FB's inevitable outcome. I know some believe that it can't happen and the FB is "the last social network" but that sounds a little bit like bubble participants claiming "this time its different".

heurist 10y ago
They'll switch to business intelligence in that case (like Foursquare). They've got enough data to last them lifetimes.
- jsemrau 10y ago
  Interesting that you mentioned Foursquare. I considered them a has been for such a long time and only recently realized that they are still around being the geolocation API provider for a bunch of products. Successful pivot, I think.
  - WorldMaker 10y ago
    My assumption was that it was never really a pivot. It seemed that the geolocation API was always their primary strategy. I thought that was why it continues to be odd that so much of Foursquare's usage and network loss seems attributable to their own consumer confusing actions to split out the social network part into a new brand (Swarm) instead of the other way around.
cheez 10y ago
They'll keep buying out competitors. It's the smart move.
jasonjei 10y ago
If anything, Ford is facing many viable competitors than FB with respect to traditional and EV cars. The warning signs of FB rising were apparent for years, but the News Corp managed MySpace did nothing to curb its rise.

dredmorbius 10y ago

That's a good list, though I'd add a few caveats / contras to it. Your "Creating the Product" and "Generating Demand" elements synergise off one another. Facebook has considerable network effects, and those network effects stimulate content, but break the chain, or boil-off customers (see "The Evaporative Cooling Effect"), and the feedback's strongly negative all the way down. MySpace imploded quite rapidly. Google's G+ had some traction initially, but worked exceptionally hard to drive off its strongest fans. Those who are slower to learn (/me raises hand) are only now being convinced of our error. But "Obsolescence" is the big one. Ford's plant degrades from the inside, and the rate of amortisation of manufacturing equipment is fairly well known. Innovation in automobiles peaked in the 1920s, though it's arguable that there were additional spurts in the 1970s (largely around economy), 1990s (quality and electronic controls), and now a possible shift to hybrid or electric vehicles, though those remain tiny portions of the entire market (highly visible, but still tiny by either unit count or, slightly less so due to much higher per-unit costs, currency marketshare). Ford, along with other US automakers was blindsided when a very modest amount of market innovation, toward more efficient vehicles, hit in the 1970s. That was an exogenous obsolesence function. Facebook and other technologies face this all the damned time. As I've slowly realised, the cost of provisioning technology hardware falls by an order of magnitude per decade. The rate is much slower for software, but there's far more capable, far more modular software rising up all the time. You can actually see this progression going back to the dawn of electronic computing, with IBM owning the market in the 1950s and 1960s, then a cascade of first minicomputers (DEC, Wang, Sun), then micros (PCs), then laptops, now handhelds, coming along at roughly 10-year intervals. Software's taken a while to catch up. Facebook had roughly 1/10 the hardware cost profile of Google (though growth of the Web may have increased that). Scaling out a startup now is largely a solved problem. Revenue model is harder -- but you need far less revenue. The other problem Facebook (and any other tech player) faces is that their own codebase becomes liability. For every table-based desktop site (say, Hacker News), that existing site layout (and perhaps much the technology underpinning it) actively impedes movement to mobile or tablet devices. I've had long arguments with designers of sites who insist on pixel- and point-based font sizing, rather than em and rem, and then screw up with low-contrast sites to boot. (HN's own fonts are barely readable for me on a 10" tablet, and no, mobile extensions don't help.) Further, "Making Money" for Facebook has been exceptionally reliant on both easy-money Federal Reserve policies, and lending and banking regulations favouring Silicon Valley style investments. A tremendous amount of advertising is itself financial services, electronics, and other startups (I'm basing this off of Google's advertisers which I'm familiar with from other sources, but suspect FB's profile is similar). That ads money could well dry up damned quickly. Tech companies have the problem that as the money dries up so does their tech workforce. Look at the salaries reported to have been offered to Yahoo's top tech talent (if you can't offer appreciating stock, you've got to bleed money). Lose programmer interest, and again there's a downward cascade of talent and capabilities, and some of the negative feedbacks start dominating.

nazka 10y ago

It's more than just Facebook the product. Facebook the company made a lot of good acquisitions like Instagram.