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I'm cautiously bullish too. Been planning to write a blog post about this, but I'm in the middle of finals right now. Anyway, summarised: - They still have lot

by IsaacL 14y ago

I'm cautiously bullish too. Been planning to write a blog post about this, but I'm in the middle of finals right now. Anyway, summarised: - They still have lots of growth potential in Asia, and other places as more and more of the planet comes online. - Zuckerberg is a Gates-style evil genius. Being grey hat is bad for PR, but good for figuring out monetisation. (cf Twitter, loved by the Valley and make no money). He is also able to make painful changes that are widely mocked but turn out to be right (news feed etc). - Facebook has lasted longer than the previous "hype cycle" for social networks. So it won't fall like MySpace, Friendster. (My theory: early SNs were mostly used by early adopters who get bored quickly. Facebook has crossed the chasm and the mainstream users aren't so keen to switch). - Think of all the people who've said they're going to quit. How many have? Have you? FB has made a really, really sticky product; which again, goes back to the "grey hat" streak in the company. - Finally monetisation. Display ads suck. But companies spend a ton on FB marketing (for pages and so on), and FB doesn't yet capture that value. Ex 1: Facebook likes are now sold on the grey market. Ex 2: In Malaysia I saw graffiti promoting someone's FB fan page. Ex 3: Have you noticed how your local cafe/pub/restaurant now asks you to "like" them? I had a friend who got paid £500 to set up a Facebook page for a small business; sure, the business owner overpaid, but the point is that FB marketing is worth a lot to such companies. If Facebook can capture that value, they're set. - There's also "black swan" revenue streams. A few years ago, who would have predicted virtual vegetables would have accounted for over 10% of FB's revenues? There might be more unknown opportunities like that in the future. I still think the stock is risky, as there's every chance this won't happen. But, say Facebook does succeed as planned; I think one FB employee said they've only done 5% of what they set out to do. Imagine 10 years time: a guy in Kazakhstan buys his first smartphone. Activating the phone requires a FB account. His contact list is his FB friends list. Instead of SMS, it's FB chat. That's the scale I imagine Zuck is thinking at. Admittedly, that's an unlikely scenario. But if it happens, Facebook could be worth two, three hundred billion, or more. Do a simple multiplication, probability times upside, and suddenly $70 billion might not seem like so much. PS I'm glad Sebastian Marshall agrees with me ;)

tomkarlo 14y ago
"Might be worth $200-$300 bn eventually" doesn't justify "worth $100 bn now" unless you believe that either: 1. That outcome is highly probable 2. That outcome will occur very quickly (within 2-3 years.) Let's say we believe the low end of that ($200bn, or 100% growth.) If we believe that will happen in 3 years, that's about 25% growth in market value annually (and a much larger rate of growth in revenues / profits to produce that, since they'll need about a 10X change to balance the multiple compression that will occur as they grow.) The potential for 25% annual returns isn't anything to sneeze at. But that's what we're saying the "upside" scenario is... 25% stock returns with a company achieving something like 200% growth in profits annually (which seems highly unlikely.) The numbers are pretty unforgiving.
- IsaacL 14y ago
  Thanks for the reply -- the valuation method I mentioned was obviously too crude, so I was hoping someone would call me out on it. I don't know much about finance but I'm actively trying to teach myself. Anyway, it would be good to find a more reliable way to quantify a company's long-term, potentially risky growth opportunities. This calculator: http://www.ft.com/cms/s/2/8a21debe-944e-11e1-bb47-00144feab49a.html#axzz1vdohf2Vq http://www.ft.com/cms/s/2/8a21debe-944e-11e1-bb47-00144feab4... was kinda useful, but a more detailed model would be interesting.
  - tomkarlo 14y ago
    There's a million models, but there isn't going to be one that's universally correct. The problem is that the inputs are generally too subjective and too noisy in any model that includes future earnings (there are some conservative ones that are based only only on past performance, but they will never match with an IPO valuation.) A great place to start is this book: Value Investing: From Graham to Buffett and Beyond ... by Bruce C. N. Greenwald ... most folks will say it's too conservative but it's a starting place.
    - IsaacL 14y ago
      Thanks, added to the reading list.
anigbrowl 14y ago
I'm neutral on FB's 'correct' value but think some of your comparisons are misplaced. It has beaten out other social networking offerings, but then AOL beat out Prodigy, Compuserve and various other competitors back in the 90s. I'm not as sure as you about the stickiness; I'm less social than the average person, but I only log into FBonce a month, at most. - There's also "black swan" revenue streams. A few years ago, who would have predicted virtual vegetables would have accounted for over 10% of FB's revenues? There might be more unknown opportunities like that in the future. That's a major weakness to me. Virtual goods are, by definition, Veblen goods, and thus the demand for them is highly elastic. Even if all your virtual eggs hatch into virtual chickens, you can't eat them; so there's no assurance that demand for virtual chickens will continue. You might find it illuminating to study the ups and downs of the Second Life land market. BTW, Sebastian Marshall is 'lionhearted' on HN, no 'lionheart'.

by IsaacL 14y ago

tomkarlo 14y ago

"Might be worth $200-$300 bn eventually" doesn't justify "worth $100 bn now" unless you believe that either: 1. That outcome is highly probable 2. That outcome will occur very quickly (within 2-3 years.) Let's say we believe the low end of that ($200bn, or 100% growth.) If we believe that will happen in 3 years, that's about 25% growth in market value annually (and a much larger rate of growth in revenues / profits to produce that, since they'll need about a 10X change to balance the multiple compression that will occur as they grow.) The potential for 25% annual returns isn't anything to sneeze at. But that's what we're saying the "upside" scenario is... 25% stock returns with a company achieving something like 200% growth in profits annually (which seems highly unlikely.) The numbers are pretty unforgiving.

IsaacL 14y ago
Thanks for the reply -- the valuation method I mentioned was obviously too crude, so I was hoping someone would call me out on it. I don't know much about finance but I'm actively trying to teach myself. Anyway, it would be good to find a more reliable way to quantify a company's long-term, potentially risky growth opportunities. This calculator: http://www.ft.com/cms/s/2/8a21debe-944e-11e1-bb47-00144feab49a.html#axzz1vdohf2Vq http://www.ft.com/cms/s/2/8a21debe-944e-11e1-bb47-00144feab4... was kinda useful, but a more detailed model would be interesting.
- tomkarlo 14y ago
  There's a million models, but there isn't going to be one that's universally correct. The problem is that the inputs are generally too subjective and too noisy in any model that includes future earnings (there are some conservative ones that are based only only on past performance, but they will never match with an IPO valuation.) A great place to start is this book: Value Investing: From Graham to Buffett and Beyond ... by Bruce C. N. Greenwald ... most folks will say it's too conservative but it's a starting place.
  - IsaacL 14y ago
    Thanks, added to the reading list.

anigbrowl 14y ago

I'm neutral on FB's 'correct' value but think some of your comparisons are misplaced. It has beaten out other social networking offerings, but then AOL beat out Prodigy, Compuserve and various other competitors back in the 90s. I'm not as sure as you about the stickiness; I'm less social than the average person, but I only log into FBonce a month, at most. - There's also "black swan" revenue streams. A few years ago, who would have predicted virtual vegetables would have accounted for over 10% of FB's revenues? There might be more unknown opportunities like that in the future. That's a major weakness to me. Virtual goods are, by definition, Veblen goods, and thus the demand for them is highly elastic. Even if all your virtual eggs hatch into virtual chickens, you can't eat them; so there's no assurance that demand for virtual chickens will continue. You might find it illuminating to study the ups and downs of the Second Life land market. BTW, Sebastian Marshall is 'lionhearted' on HN, no 'lionheart'.