6 ms·

Is it just me or are people blowing that "$50b" valuation of facebook out of proportion? And applying P/E * Profit to other companies doesn't really seem like a

Is it just me or are people blowing that "$50b" valuation of facebook out of proportion? And applying P/E * Profit to other companies doesn't really seem like an interesting metric, especially when comparing it to well-established companies. Buying Facebook shares right now at 100 P/E seems like a long bet that absolute profit will improve within the next N years (where N is some acceptable length of time for the investment). That's all. The $50b valuation is obviously (to me anyway) not based on current numbers, but expected future numbers. The amount of indignant disbelief going on is amazing. I would understand this if the OP's money was being invested against his will, but when GS and others are making this bet with their own (or their trusting clients's) money, where's the problem? Are people angry at FB for being popular?

steveklabnik 16y ago
> but when GS and others are making this bet with their own (or their trusting clients's) money, where's the problem? While I don't have an opinion on the Facebook valuation, I can see why people are angry at Goldman for making what they perceive as being as being a dumb investment: when your banks just failed so hard that you had to give them zillions of dollars, and it was because they started inventing fun ways to shove money in random places, you tend to be a little overly sensitive when they (seemingly) start doing dumb stuff again. Of course, an overvaluation of Facebook is not in the same league as 'everyone's got credit default swaps on everything,' but I'm not surprised by a certain level of 'Oh financial industry, you crazy!'
spolsky 16y ago
Not just you. People are blowing the valuation out of proportion. A 100 PE ratio is completely understandable for an earth-changing company like Facebook at this stage in its growth. I myself wouldn't invest at that price, but that doesn't mean it's entirely bonkers. This reminds me of the late 1990s, when Blodget said that AMZN would go to $400. It was so outlandishly ridiculous that his crazy "Amazon 400" prediction was all anyone could talk about. In a few weeks, the stock actually went to 400. Then it went to $1200 (split adjusted). Today it's $2232 (split adjusted). Like all stocks, it went up and down (a lot) in the meantime. It is completely absurd, too, to compare the PE ratio of a company that's growing at Facebook's rate to the PE ratio of a company like Kraft. Completely absurd. It's such a fundamental error in understanding how to value companies that the OP's entire analysis is safe to ignore.
brosephius 16y ago
Are people angry at FB for being popular? yes, pretty much.
yoseph 16y ago
Hi andreaja, Thanks for the response. I'm the author of the article (Macco, thanks for submitting it!). You're right that the $50B valuation isn't based on current numbers. It's based on what Facebook might be able to do in the future. Imagine you were buying a house. It's a great house, has a solid foundation, beautiful interiors, and is in an excellent neighbourhood that is constantly appreciating. Would you pay what it might be worth in 3 years, today? I understand the argument about growth, but even from that end, it doesn't completely stand up. If we were to use the PEG Ratio (http://en.wikipedia.org/wiki/PEG_ratio http://en.wikipedia.org/wiki/PEG_ratio), for Facebook to be fairly valued at $50B, it has to grow its Net Income by 100% annually, on average over the next five years. It's possible Facebook might be able to do that next year, but then it'll have 1 billion users. That's 14% of the world's population. That's huge. Being generous though, let's extend that 100% growth into the year after. Then, Facebook would have 2 billion users, 28% of the world's population, and assuming current margins, they would only be eeking out $2 billion in profit. Will it be worth $200 billion then? I would say no and I would say Facebook's not worth $50 billion now.
- semanticist 16y ago
  Facebook's income doesn't need to grow linearly with their number of users. They could, instead, look at ways to make more money per user. Since they've been spending their time until now focussed on getting lots of users, I'd imagine it's safe to say that they could increase their revenue per user well beyond what it's currently at.
  - yoseph 16y ago
    I hope, for the sake of current investors, they find other ways of monetizing users. But my example is intended to illustrate the overvaluation based on present methods of monetization. Nevertheless, I don't think it's a safe assumption that they could increase their revenue per user well beyond its current level. Generally speaking, it's pretty tough for free services to monetize themselves. The only routes seem to be ads & taking a cut of revenue from apps that run on its platform. Facebook would really have to pull a rabbit out of its hat to increase its revenue per user well beyond its current level. It's certainly not a safe assumption.

steveklabnik 16y ago

> but when GS and others are making this bet with their own (or their trusting clients's) money, where's the problem? While I don't have an opinion on the Facebook valuation, I can see why people are angry at Goldman for making what they perceive as being as being a dumb investment: when your banks just failed so hard that you had to give them zillions of dollars, and it was because they started inventing fun ways to shove money in random places, you tend to be a little overly sensitive when they (seemingly) start doing dumb stuff again. Of course, an overvaluation of Facebook is not in the same league as 'everyone's got credit default swaps on everything,' but I'm not surprised by a certain level of 'Oh financial industry, you crazy!'

spolsky 16y ago

Not just you. People are blowing the valuation out of proportion. A 100 PE ratio is completely understandable for an earth-changing company like Facebook at this stage in its growth. I myself wouldn't invest at that price, but that doesn't mean it's entirely bonkers. This reminds me of the late 1990s, when Blodget said that AMZN would go to $400. It was so outlandishly ridiculous that his crazy "Amazon 400" prediction was all anyone could talk about. In a few weeks, the stock actually went to 400. Then it went to $1200 (split adjusted). Today it's $2232 (split adjusted). Like all stocks, it went up and down (a lot) in the meantime. It is completely absurd, too, to compare the PE ratio of a company that's growing at Facebook's rate to the PE ratio of a company like Kraft. Completely absurd. It's such a fundamental error in understanding how to value companies that the OP's entire analysis is safe to ignore.

brosephius 16y ago

Are people angry at FB for being popular? yes, pretty much.

yoseph 16y ago

Hi andreaja, Thanks for the response. I'm the author of the article (Macco, thanks for submitting it!). You're right that the $50B valuation isn't based on current numbers. It's based on what Facebook might be able to do in the future. Imagine you were buying a house. It's a great house, has a solid foundation, beautiful interiors, and is in an excellent neighbourhood that is constantly appreciating. Would you pay what it might be worth in 3 years, today? I understand the argument about growth, but even from that end, it doesn't completely stand up. If we were to use the PEG Ratio (http://en.wikipedia.org/wiki/PEG_ratio http://en.wikipedia.org/wiki/PEG_ratio), for Facebook to be fairly valued at $50B, it has to grow its Net Income by 100% annually, on average over the next five years. It's possible Facebook might be able to do that next year, but then it'll have 1 billion users. That's 14% of the world's population. That's huge. Being generous though, let's extend that 100% growth into the year after. Then, Facebook would have 2 billion users, 28% of the world's population, and assuming current margins, they would only be eeking out $2 billion in profit. Will it be worth $200 billion then? I would say no and I would say Facebook's not worth $50 billion now.

semanticist 16y ago
Facebook's income doesn't need to grow linearly with their number of users. They could, instead, look at ways to make more money per user. Since they've been spending their time until now focussed on getting lots of users, I'd imagine it's safe to say that they could increase their revenue per user well beyond what it's currently at.
- yoseph 16y ago
  I hope, for the sake of current investors, they find other ways of monetizing users. But my example is intended to illustrate the overvaluation based on present methods of monetization. Nevertheless, I don't think it's a safe assumption that they could increase their revenue per user well beyond its current level. Generally speaking, it's pretty tough for free services to monetize themselves. The only routes seem to be ads & taking a cut of revenue from apps that run on its platform. Facebook would really have to pull a rabbit out of its hat to increase its revenue per user well beyond its current level. It's certainly not a safe assumption.