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The researchers found that the revenue of the average company going public between 1996 and 2010 grew by 212% over the five years after its IPO. Assuming that

• ChuckMcM 14y ago
  Agreed. I read this and said "You are looking back to 1996? Seriously?" Now I am sure that the market will figure out what to do with the company but I sure as heck don't see these guys shorting a few hundred million shares. But there is a lot of challenges in wrapping your head around the economics here as well. This is why a lot of people don't understand Google's profitability either.
  • StandardBub 14y ago
    The 1996 to 2000 period was remarkable as the dot-com IPO crazy period. It's the closest, and most optimistic investment environment to what we are seeing today, thus makes a good comparison for making an optimistic valuation model for Facebook.
    • pyoung 14y ago
      Are you serious? The two periods are hardly comparable. See link. http://www.hbs.edu/units/finance/pdf/Where%20Have_April_3_2012.pdf http://www.hbs.edu/units/finance/pdf/Where%20Have_April_3_20...
      • ChuckMcM 14y ago
        That is a great paper btw. It's nice to see some analysis of the impact of velocity on startups and IPOs rather than just regulation.
    • pbreit 14y ago
      Too bad the study's period was 1996 to 2010.
      • JumpCrisscross 14y ago
        Actually, it's June 1996 to December 2005 [1] [1] http://bear.warrington.ufl.edu/ritter/post_ipo_report_05222012.pdf http://bear.warrington.ufl.edu/ritter/post_ipo_report_052220... (page 9, Panel C)
• johncarpinelli 14y ago
  FB is a much larger company than the average IPO. Larger companies often grow slower as they dominate their markets. With 900 million users, it would seem that the developed countries are fairly saturated and won't see much growth in the user base. I would be interested to see some projections for FB costs over the next five years. They no longer have the lure of pre-IPO equity to attract new employees. They might have to pay higher salaries instead. Many insiders will be cashing out in the coming months and moving on, so I would guess that FB salary costs are going to climb significantly.
  • xyzzyz 14y ago
    900 million users are not their customers, they are the product. I'm sure that there are lots of people and companies that haven't been advertising themselves on facebook so far -- I'm not suggesting they should, it's just the market isn't really saturated.
• redwood 14y ago
  Yes and no... considering FB's incredibly massive eyes on page, today, which might not last... they've been pretty bad about monetizing and they've had about 6 years of knowing they were huge to do it. That's not a great track record (as far as making big returns)
  • cageface 14y ago
    Sure. It's not hard to construct all kinds of failure scenarios for FB. I just don't think that crude averages are much use here at all. In general I think that an average just isn't a very useful statistic. It throws away way too much information.
    • deleted 14y ago
      [deleted]
    • codeka 14y ago
      It would be interesting to note what the standard deviation is on those figures. My guess is it's quite high, which does give Facebook a bit of breathing room.
      • philbarr 14y ago
        I'm surprised how often a mean is quoted without a standard deviation. Especially in an analysis like this. It's only telling you half the story.
• astrofinch 14y ago
  Standard bubble talk: "This is historically unprecedented! Everything is going to be different this time!"
  • JumpCrisscross 14y ago
    Two issues: 1. FB doesn't behave like the sample mean 2. FB doesn't behave like the sample 1 does not mean 2. In fact, without any statistics of dispersion (which the Kauffman paper doesn't provide) we cannot rule on 2 whatsoever.
    • joering2 14y ago
      Because of people like you facebook is such a screw up stock from day one. Look, I don't care how fast they grew and I don't care how amazing they are! Show me the _fucking_ money!! This is what stockholders are screaming for! Facebook is amazing in being in business of giving free candy! Free! Free candy to people that are busy consuming it so you won't monetize on them! I know they have trillion users but this won't do it in terms of revenue. Stop believing that technology company that did tremendous job at connecting the world together will do equally tremendous job at milking them into the $200B stratosphere!!
  • Confusion 14y ago
    A. We're in a bubble. B. We're not in a bubble A. You're saying things people also say when we're in a bubble, so we're in a bubble B. I'm saying things people also say when we're not in a bubble B. You, on the other hand, are saying the exact things people say when we're not in a bubble A. I'm saying things that those that are right also say when we are in a bubble B. Well, I'm saying things that those that are right also say when we "are not" in a bubble. It's all standard talk, both your comment and what you're responding to and it all gets said both inside and outside of bubbles. What 'is being said' is never an argument. Everything is always 'being said'. You would have said the same thing about Google and Amazon last time around. For some reason, they were different. Don't make predictions if you don't have an outstanding track record to back them up. Otherwise, nobody has any reason to believe you.
• hessenwolf 14y ago
  Reading Peter Thiel's lecture notes and I think it is the sixth one that goes into great detail about the returns of new companies following a power law. Hence, the average is mindbendingly irrelevant. I am certainly not buying into facebook, but not due to this analysis.
  • patrickk 14y ago
    That's actually a great point. Even after reading those notes I still wouldn't have thought of applying the power law to my thinking about Facebook (I don't think Facebook will prove anything special long term but it's always useful to be critical in your thinking and consider multiple points of view). As an aside, those notes are an incredible way of thinking about the world differently. I've gotten a lot out of it.
  • dododo 14y ago
    if it is a power law in the sense that a few companies return a lot, whilst most return a little, how does that make the mean irrelevant? the mean of a power law of this form is more skewed by the few companies returning a lot than it is by the majority. assuming that more than 50% of the companies return a little, the median would be irrelevant, but the mean is very sensitive to outliers.
    • tedunangst 14y ago
      Consider four companies' returns: [1, 1, 1, 100]. The median, 1, is a reasonable predictor for the next company's return. The mean, 25, doesn't seem like a likely outcome.
      • dododo 14y ago
        there is not a normative way to discriminate between those two predictions. it comes down to what kind of loss you incur for making an incorrect prediction. for mean, it's a squared loss (which penalizes you for being wrong in the tails more heavily) but for a median it's the absolute loss. the argument being made was that fb is an outlier and (as I read it) the mean didn't reflect it, so the maths was "lazy" as it didn't take that into account. actually the mean does take these outliers into account (since it's corresponding loss function penalizes you harshly for being wrong in the tails) and so is probably not too unreasonable at predicting on outlier companies (certainly better than the median).
• nandemo 14y ago
  > FB may be many things but average is certainly not one of them. Do you mean the assumption of 212% growth over 5 years is lowish? If so, I agree. As for the average return: the author is fixing a price at T+5years, so if you assume a higher-than-average expected return for Facebook, then its current stock price should be even lower. Also note that even as a back-of-envelope estimate, his analysis is flawed because the 212% figure was calculated by comparing revenues adjusted for inflation, while the 11% figure is for non-adjusted total return. The corresponding real (inflation-adjusted) average return is 7%: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm http://www.simplestockinvesting.com/SP500-historical-real-to...
  • lunaru 14y ago
    I think it's even lower than 7% if you go back far enough: http://home.earthlink.net/~intelligentbear/com-dj-infl.htm http://home.earthlink.net/~intelligentbear/com-dj-infl.htm The truth is, the stock market, given a long enough timespan, barely beats inflation.
    • z92 14y ago
      > The truth is, the stock market, given a long enough timespan, barely beats inflation. I want to believe that.
    • rjtavares 14y ago
      I'm not even going into how they change official statistics arbitrarily on a particular time period, but the article itself says that "Dividends are excluded, so the chart only shows capital gains. The dividend yield of the S&P is running near 2%." So, 1.9% above inflation plus 2% dividend yield, plus 2.3% current CPI, plus 2.7% "shadow CPI" (the number is from that article you posted) you get a 9% return. That means that facebook should be worth more, not less (since you are discounting at a lower rate).
      • meric 14y ago
        Also the dividend payout has not been 2% for all time - back in the 50's it was around 7%. http://www.financialsense.com/contributors/ronald-griess/comparing-historical-bond-yields-to-sp-composite-dividend-and-earnings-yields-is-silver-breaking-out http://www.financialsense.com/contributors/ronald-griess/com...
• tokenadult 14y ago
  FB may be many things but average is certainly not one of them. Several of the other comments you have received relate to this idea, so please allow me to ask a specific question (directed both to you and to onlookers). What is not average about Facebook? For some commenting here, the specific question I have is what is above average about Facebook, related to its revenue, to suggest it will overperform the average of historic experience of companies that have IPOed? As an investor, interested in a non-lazy analysis, what should I look for to decide whether or not Facebook is a good investment at the current price of its stock? I note that you wrote, I'm as bearish as anybody on FB but this seems like extremely lazy analysis. so I'm not specifically asking you for a rationale for buying Facebook. Other comments at this comment level or below imply that there may be a rationale (perhaps unconvincing to you, but perhaps convincing to some onlooker) for buying Facebook's stock at today's price. What rationale is that? If I had some extra money, would I be well advised to invest it in Facebook stock? Why or why not? I'd appreciate hearing from anyone who has an analysis that goes deeper than the news headlines of the last week since the Facebook IPO. Thanks.
  • mattmanser 14y ago
    Generally speaking it's that they haven't had their 'ah-ha' moment of monetization yet that Google had with ad-words. Some think it'll never come. But it's a factor.
    • wildbunny 14y ago
      They have, and it was facebook credits. If that didn't maximise their profits then nothing will.
  • daguar 14y ago
    Well, the analytical question here is: what is the appropriate sample for comparison? The article uses US IPOs 1996-2010 as the initial sample. I'd like to know how sensitive this is to expanding or narrowing that range. How does that average change if you adjust the range? (The academic article may have some note of this.) Then, the article makes comparison to Google's current price-to-sales ratio as a benchmark (5.51-1). The analytic justification is nothing more than "[s]ince Facebook FB -0.64% is most often compared to Google GOOG -0.66%..." Some questions I'd ask about this: - What did Google's P/S ratio look like at IPO, and what was its growth? - What does Facebook's P/S ratio look like compared a broader sample of tech companies' P/S ratios? Or including non-tech companies? - Why not use price-to-earnings ratio? (I'm not a finance guy, but the subtle difference in wording here gives me pause to at least investigate the question.) So what you're hearing me say is: we need sensitivity analysis. The assumed benchmarks appear arbitrary enough that we have to see how the results change when you adjust the inputs. Lastly, there's the age-old fundamentals versus intangibles question: investors make their decisions based on both. The fundamental analysis (of earnings, etc., like the article does) is not deterministic: it just gives you context. Intangibles (faith in management, broader understanding of how the market will shift and affect the firm's competitive position) matter, too. They're just, well, intangible. But also included under the umbrella of intangibles is how investor sentiment toward the company may change. If people think FB is going to make some huge announcements in the next year that will send the share price skyrocketing for a short (but not sustainable) high watermark, then that potential short-term return is worth buying. [Edit 5/25 6:57a PT - changed range from 96-00 to 96-10 based on correction. Thanks!]