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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 cu

by 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.
steveplace 16y ago
I'm FB valuation agnostic because I don't have enough information to properly value it. We can talk about PEG but since they are not yet a public company they don't issue guidance. Also, if revenue was based solely off userbase, then GOOG (for example) would not be at its current valuation. Does the current valuation of FB look less sky-high if we assume ARPU grows by 30% annually for 5 years?
andreaja 16y ago
This is a gross simplification. You're simply correlating Facebook's value to their number of users, which is taking two indirectly related numbers and putting them up against eachother. Even your metaphor of the house is flawed; the house is not generating income.

by yoseph 16y ago

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.

steveplace 16y ago

I'm FB valuation agnostic because I don't have enough information to properly value it. We can talk about PEG but since they are not yet a public company they don't issue guidance. Also, if revenue was based solely off userbase, then GOOG (for example) would not be at its current valuation. Does the current valuation of FB look less sky-high if we assume ARPU grows by 30% annually for 5 years?

andreaja 16y ago

This is a gross simplification. You're simply correlating Facebook's value to their number of users, which is taking two indirectly related numbers and putting them up against eachother. Even your metaphor of the house is flawed; the house is not generating income.