7 ms·

Still Too Pricey

76 points by lmg643 14y ago

antr 14y ago
$15 / share is a fair valuation given Facebook's cash flow profile and top-line decelerating growth. Said back on 19th May (the day after FB's IPO): "asset managers [do is] look at Free Cash Flow to Equity, not Net Income. On a FCF to Equity valuation, FB IPOed at +220x. Even at a generous P/E or FCF/E ratio of 25x, Facebook's Free Cash Flow needs to go from $450m to $4,000m in the next 24-36 months. Do you think that is possible? After looking at their infrastructure needs I think not." http://news.ycombinator.com/item?id=4002988 http://news.ycombinator.com/item?id=4002988
walru 14y ago
They don't even make a firm stance in saying that it's worth $15/share. With decelerating growth and the fact they can't figure out how to monetize mobile I have no idea where they figure FB is worth that much. A 47x multiple on these guys is a joke. This recent rally is akin to a dead cat bounce. Nothing in the market goes straight up or straight down. We'll be seeing sub-$15 soon.. Consider it a x-mas present. Actually while we're on the topic.. the Dow is getting close to 14,000 again; our high from 2008. Don't be surprised to see a double top on the markets and then a sharp retrace afterward.
- s_henry_paulson 14y ago
  Actually I think their recent approach to monetizing the mobile market is quite clever. http://techcrunch.com/2012/09/18/facebook-mobile-ad-network/ http://techcrunch.com/2012/09/18/facebook-mobile-ad-network/
  - spaghetti 14y ago
    It would be awesome if mobile developers could put targeted ads in their apps. I've tried Admob and Apple's iAds and there's literally no targeting. Two apps, one that focuses exclusively on pizza and another app that focuses exclusively on beer will show the same totally irrelevant ad for, say, some game app or "free text messages!".
    - mgkimsal 14y ago
      how much of that may be due to not having enough relevant inventory? there's definitely a chicken/egg problem involved in targeted ad serving, but you'd have thought someone (apple?) might have been able to crack that nut by now.
      - spaghetti 14y ago
        In my particular case I don't think there was an inventory limitation issue. Reason is websites with Adsense addressing the same niche were serving extremely relevant and targeted ads while my Android app with Admob just gets junk. The obvious question is how does the Admob banner know about the app's contents? On the Admob site there's a note saying that the app's description will be used to target ads. However this doesn't seem to work or I'm misunderstanding. Either way my ads still suck.
- pault 14y ago
  Should I consider this investment advice?
  - walru 14y ago
    no.
- genwin 14y ago
  The Dow could reach 18,000 in a year, or 5,000. FB has $billions to devise new profit streams.
- tatsuke95 14y ago
  >"Don't be surprised to see a double top on the markets and then a sharp retrace afterward." The Fed is pumping money into the system, and has said they're going to do it indefinitely. The stock market is going up (at least in nominal terms). At least, that's where my money is.
  - walru 14y ago
    The market will continue to go up until it doesn't anymore. Technical Analysis is your only friend. Or to put it another way; if the fed is pumping money into the market it only makes it easier for others to exit.
    - conroe64 14y ago
      As the saying goes, "Don't fight the Fed." Technical Analysis is voodoo and tea leaves.
    - tatsuke95 14y ago
      Exit to where? Treasuries at all time low yields? 20% of people invest in stocks, and these people control almost 50% of wealth in America. A major goal of QE is to pump the market up to generate a wealth effect for these people, and (hopefully) pull the economy up with it. You can see that this happened by checking out the SPY chart from Nov. 2008 (QE1) onward. As the other commenter noted, don't fight the Fed. Contrary to what you read in the popular media, they know what they are doing. If you hopped on board in '08, you got massive returns the past few years.
xpose2000 14y ago
I am tiring of these articles. I like how some firms decide to throw in P/E comparisons to Apple and Google (Two seasoned juggernaut companies.) . Yet LinkedIn is also a social network, has an absurd P/E ratio over 100, but that's okay. "Anyone who owns Facebook should be exceptionally troubled that they're still trying to 'figure out' mobile monetization and had to lay out $1 billion for Instagram because some start-up had figured out mobile pictures better than Facebook," says one institutional investor. These are what the experts have to say? He hardly sounds like an expert to me. Tell me a company who excels at mobile monetization. I wonder if Wallstreet fully grasps what Facebook is all about and how it fits into the grand scheme of things. Perhaps looking at traditional markers for evaluating a company like Facebook isn't working? They fail to realize that Facebook is the most traffic'd website in the world. (According to Alexa: http://www.alexa.com/topsites http://www.alexa.com/topsites). Somehow $15 doesn't sound right.
- jbri 14y ago
  Why doesn't $15 "sound right"? Because it's not 700? Judging share prices by whether they "sound right" is not good investment advice.
  - jonknee 14y ago
    It's all about the number of shares. Google or Apple could be at $15 as well and still have the same market cap.
- matwood 14y ago
  I wonder if Wallstreet fully grasps what Facebook is all about and how it fits into the grand scheme of things. Perhaps looking at traditional markers for evaluating a company like Facebook isn't working? They fail to realize that Facebook is the most traffic'd website in the world. (According to Alexa: http://www.alexa.com/topsites http://www.alexa.com/topsites). Somehow $15 doesn't sound right. Too young to remember the dotcom boom? If I gave everyone in the world a $1 every time they visited my site I could also have the most traffic'd site in the world, but that wouldn't make my site worth any money. Of course FB isn't like that, but the point is that traffic is worthless until you can monetize it. IMHO, their biggest problem is monetizing their users without running them away.
antidaily 14y ago
Just a stock I have no interest of owning.
SagelyGuru 14y ago
P/E ratio is never irrelevant. I said soon after the IPO that FB will go down to $10 and I have not seen anything yet to change my mind.
- tallanvor 14y ago
  $10 is the price point I've been expecting as well.
ericdykstra 14y ago
Instead of writing an opinion piece that will likely influence a few people, why doesn't this guy use his exemplary knowledge of Facebook and the stock market for profit? Why not keep this information to himself and short $fb or sell the information to an institutional investor? My guess is that his "knowledge" is worth more as an article that he got paid $25 for writing than it is in actual practice.
- smoyer 14y ago
  He's already shorted the market and is now executing the short-sell version of a pump-and-dump ... or maybe he's actually ethical and doesn't trade in the companies he analyzes. How would we know the difference?
- Encosia 14y ago
  For what it's worth, that's a real publication, not Demand Media. The article should have netted him a couple orders of magnitude more than $25.
- joering2 14y ago
  First and foremost, eric: it is in his best interest to inform everyone about his opinion. If more follow, his short option can only bring more profits. Second of all, being right in opinion about market is the best damn PR you can imagine. After all, its all about profits. If you "guessed" market good enough in the past, you more likely attract rich investors going forward. So as much as this guy can short the stock for $5MM himself and keep his mouth shut, it is much smarter to short it for the same amount, wait for others to join helping his position to grow, and if hes right on his bet, attract investors with $50MM in the future.
- true_religion 14y ago
  Because participating the stock market isn't risk free. Even if you are 100% correct (an impossibility) that a stock ought to be valued at a certain price, there is no guarantee that you can place your orders at the right time in order to make a profit on it minus transaction costs. There's a common saying that goes loosely: 'the market can stay irrational longer than you can stay solvent'. So given that likelihood, its not surprising that some choose to take a guaranteed payday by writing an article, instead of going forth and rolling the dice.
antidoh 14y ago
Facebook could expand or replace their customer base. Currently their major (only?) customers are companies paying Facebook to place ads in front of people who don't want to see them and may in fact try hard not to see them. Although ads has worked for radio and television, it seems shaky to me. It reminds me of the early days of television and radio, where shows on TV were largely plays adopted to TV, because that's what people did with the preceding medium, and news programming was an announcer reading the newspaper, because the newspaper was where news came from prior to radio and TV. Ads worked for the preceding media, but that's no reason not to innovate monetization on the web. Facebook could, instead or in addition, charge money to its users for access to Facebook. They could sell their mobile app. They could ... well, they're smarter than me, they can do their own innovation. :) If your uses don't commit to use by spending money, then they're essentially transient, waiting for the next free thing. Make Facebook a service that people don't complain about at every changed policy and implementation, make it so good that people will pay to use it, and I'll be impressed. (Not to take away at all from the accomplishment so far.)
- joe_the_user 14y ago
  If Facebook charged for basic use, their user base would plummet quickly, which would make that use not very valuable. If Facebook was smart enough to think of effective new ways to make money that we haven't thought of, they'd be doing them now.
  - antidoh 14y ago
    HBO.
  - rhizome 14y ago
    Is Ask.com still doing private-label corporate stuff?
lmg643 14y ago
Somehow this link got renamed (not by me). The cover of Barron's says "Facebook is Worth $15". See for yourself: http://barrons.wsj.net/public/resources/images/ON-AY643_cover0_KS_20120922014840.jpg http://barrons.wsj.net/public/resources/images/ON-AY643_cove...
kosei 14y ago
It will also be incredibly difficult for Facebook to monetize its games, which still represent a sizable portion of their .com revenue. No game company will be willing to give them a cut of their mobile revenue when Apple is already taking a 30% take. That should be especially concerning to investors.
dreamr 14y ago
I am tiring of people struggling to try to monetize all web traffic. It seems like some people just cannot accept that there may be noncommercial elements of the web and that those elements might be extremely popular. They might even be the most popular elements of the entire web. Imagine that.
RockyMcNuts 14y ago
If you're into this sort of thing, Aswath Damodaran teaches a valuation class at NYU which is online now, and he arrived at an FB valuation of $24. http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteqfall12.htm http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteq... http://aswathdamodaran.blogspot.com/2012/08/facebook-face-plant-time-to-friend.html http://aswathdamodaran.blogspot.com/2012/08/facebook-face-pl...
therandomguy 14y ago
If someone knew it is overpriced and it will go down further they could make millions by shorting. I'm happy for the author's future riches.

76 points by lmg643 14y ago

antr 14y ago

$15 / share is a fair valuation given Facebook's cash flow profile and top-line decelerating growth. Said back on 19th May (the day after FB's IPO): "asset managers [do is] look at Free Cash Flow to Equity, not Net Income. On a FCF to Equity valuation, FB IPOed at +220x. Even at a generous P/E or FCF/E ratio of 25x, Facebook's Free Cash Flow needs to go from $450m to $4,000m in the next 24-36 months. Do you think that is possible? After looking at their infrastructure needs I think not." http://news.ycombinator.com/item?id=4002988 http://news.ycombinator.com/item?id=4002988

walru 14y ago

They don't even make a firm stance in saying that it's worth $15/share. With decelerating growth and the fact they can't figure out how to monetize mobile I have no idea where they figure FB is worth that much. A 47x multiple on these guys is a joke. This recent rally is akin to a dead cat bounce. Nothing in the market goes straight up or straight down. We'll be seeing sub-$15 soon.. Consider it a x-mas present. Actually while we're on the topic.. the Dow is getting close to 14,000 again; our high from 2008. Don't be surprised to see a double top on the markets and then a sharp retrace afterward.

s_henry_paulson 14y ago
Actually I think their recent approach to monetizing the mobile market is quite clever. http://techcrunch.com/2012/09/18/facebook-mobile-ad-network/ http://techcrunch.com/2012/09/18/facebook-mobile-ad-network/
- spaghetti 14y ago
  It would be awesome if mobile developers could put targeted ads in their apps. I've tried Admob and Apple's iAds and there's literally no targeting. Two apps, one that focuses exclusively on pizza and another app that focuses exclusively on beer will show the same totally irrelevant ad for, say, some game app or "free text messages!".
  - mgkimsal 14y ago
    how much of that may be due to not having enough relevant inventory? there's definitely a chicken/egg problem involved in targeted ad serving, but you'd have thought someone (apple?) might have been able to crack that nut by now.
    - spaghetti 14y ago
      In my particular case I don't think there was an inventory limitation issue. Reason is websites with Adsense addressing the same niche were serving extremely relevant and targeted ads while my Android app with Admob just gets junk. The obvious question is how does the Admob banner know about the app's contents? On the Admob site there's a note saying that the app's description will be used to target ads. However this doesn't seem to work or I'm misunderstanding. Either way my ads still suck.
pault 14y ago
Should I consider this investment advice?
- walru 14y ago
  no.
genwin 14y ago
The Dow could reach 18,000 in a year, or 5,000. FB has $billions to devise new profit streams.
tatsuke95 14y ago
>"Don't be surprised to see a double top on the markets and then a sharp retrace afterward." The Fed is pumping money into the system, and has said they're going to do it indefinitely. The stock market is going up (at least in nominal terms). At least, that's where my money is.
- walru 14y ago
  The market will continue to go up until it doesn't anymore. Technical Analysis is your only friend. Or to put it another way; if the fed is pumping money into the market it only makes it easier for others to exit.
  - conroe64 14y ago
    As the saying goes, "Don't fight the Fed." Technical Analysis is voodoo and tea leaves.
  - tatsuke95 14y ago
    Exit to where? Treasuries at all time low yields? 20% of people invest in stocks, and these people control almost 50% of wealth in America. A major goal of QE is to pump the market up to generate a wealth effect for these people, and (hopefully) pull the economy up with it. You can see that this happened by checking out the SPY chart from Nov. 2008 (QE1) onward. As the other commenter noted, don't fight the Fed. Contrary to what you read in the popular media, they know what they are doing. If you hopped on board in '08, you got massive returns the past few years.

xpose2000 14y ago

I am tiring of these articles. I like how some firms decide to throw in P/E comparisons to Apple and Google (Two seasoned juggernaut companies.) . Yet LinkedIn is also a social network, has an absurd P/E ratio over 100, but that's okay. "Anyone who owns Facebook should be exceptionally troubled that they're still trying to 'figure out' mobile monetization and had to lay out $1 billion for Instagram because some start-up had figured out mobile pictures better than Facebook," says one institutional investor. These are what the experts have to say? He hardly sounds like an expert to me. Tell me a company who excels at mobile monetization. I wonder if Wallstreet fully grasps what Facebook is all about and how it fits into the grand scheme of things. Perhaps looking at traditional markers for evaluating a company like Facebook isn't working? They fail to realize that Facebook is the most traffic'd website in the world. (According to Alexa: http://www.alexa.com/topsites http://www.alexa.com/topsites). Somehow $15 doesn't sound right.

jbri 14y ago
Why doesn't $15 "sound right"? Because it's not 700? Judging share prices by whether they "sound right" is not good investment advice.
- jonknee 14y ago
  It's all about the number of shares. Google or Apple could be at $15 as well and still have the same market cap.
matwood 14y ago
I wonder if Wallstreet fully grasps what Facebook is all about and how it fits into the grand scheme of things. Perhaps looking at traditional markers for evaluating a company like Facebook isn't working? They fail to realize that Facebook is the most traffic'd website in the world. (According to Alexa: http://www.alexa.com/topsites http://www.alexa.com/topsites). Somehow $15 doesn't sound right. Too young to remember the dotcom boom? If I gave everyone in the world a $1 every time they visited my site I could also have the most traffic'd site in the world, but that wouldn't make my site worth any money. Of course FB isn't like that, but the point is that traffic is worthless until you can monetize it. IMHO, their biggest problem is monetizing their users without running them away.

antidaily 14y ago

Just a stock I have no interest of owning.

SagelyGuru 14y ago

P/E ratio is never irrelevant. I said soon after the IPO that FB will go down to $10 and I have not seen anything yet to change my mind.

tallanvor 14y ago
$10 is the price point I've been expecting as well.

ericdykstra 14y ago

Instead of writing an opinion piece that will likely influence a few people, why doesn't this guy use his exemplary knowledge of Facebook and the stock market for profit? Why not keep this information to himself and short $fb or sell the information to an institutional investor? My guess is that his "knowledge" is worth more as an article that he got paid $25 for writing than it is in actual practice.

smoyer 14y ago
He's already shorted the market and is now executing the short-sell version of a pump-and-dump ... or maybe he's actually ethical and doesn't trade in the companies he analyzes. How would we know the difference?
Encosia 14y ago
For what it's worth, that's a real publication, not Demand Media. The article should have netted him a couple orders of magnitude more than $25.
joering2 14y ago
First and foremost, eric: it is in his best interest to inform everyone about his opinion. If more follow, his short option can only bring more profits. Second of all, being right in opinion about market is the best damn PR you can imagine. After all, its all about profits. If you "guessed" market good enough in the past, you more likely attract rich investors going forward. So as much as this guy can short the stock for $5MM himself and keep his mouth shut, it is much smarter to short it for the same amount, wait for others to join helping his position to grow, and if hes right on his bet, attract investors with $50MM in the future.
true_religion 14y ago
Because participating the stock market isn't risk free. Even if you are 100% correct (an impossibility) that a stock ought to be valued at a certain price, there is no guarantee that you can place your orders at the right time in order to make a profit on it minus transaction costs. There's a common saying that goes loosely: 'the market can stay irrational longer than you can stay solvent'. So given that likelihood, its not surprising that some choose to take a guaranteed payday by writing an article, instead of going forth and rolling the dice.

antidoh 14y ago

Facebook could expand or replace their customer base. Currently their major (only?) customers are companies paying Facebook to place ads in front of people who don't want to see them and may in fact try hard not to see them. Although ads has worked for radio and television, it seems shaky to me. It reminds me of the early days of television and radio, where shows on TV were largely plays adopted to TV, because that's what people did with the preceding medium, and news programming was an announcer reading the newspaper, because the newspaper was where news came from prior to radio and TV. Ads worked for the preceding media, but that's no reason not to innovate monetization on the web. Facebook could, instead or in addition, charge money to its users for access to Facebook. They could sell their mobile app. They could ... well, they're smarter than me, they can do their own innovation. :) If your uses don't commit to use by spending money, then they're essentially transient, waiting for the next free thing. Make Facebook a service that people don't complain about at every changed policy and implementation, make it so good that people will pay to use it, and I'll be impressed. (Not to take away at all from the accomplishment so far.)

joe_the_user 14y ago
If Facebook charged for basic use, their user base would plummet quickly, which would make that use not very valuable. If Facebook was smart enough to think of effective new ways to make money that we haven't thought of, they'd be doing them now.
- antidoh 14y ago
  HBO.
- rhizome 14y ago
  Is Ask.com still doing private-label corporate stuff?

lmg643 14y ago

Somehow this link got renamed (not by me). The cover of Barron's says "Facebook is Worth $15". See for yourself: http://barrons.wsj.net/public/resources/images/ON-AY643_cover0_KS_20120922014840.jpg http://barrons.wsj.net/public/resources/images/ON-AY643_cove...

kosei 14y ago

It will also be incredibly difficult for Facebook to monetize its games, which still represent a sizable portion of their .com revenue. No game company will be willing to give them a cut of their mobile revenue when Apple is already taking a 30% take. That should be especially concerning to investors.

dreamr 14y ago

I am tiring of people struggling to try to monetize all web traffic. It seems like some people just cannot accept that there may be noncommercial elements of the web and that those elements might be extremely popular. They might even be the most popular elements of the entire web. Imagine that.

RockyMcNuts 14y ago

If you're into this sort of thing, Aswath Damodaran teaches a valuation class at NYU which is online now, and he arrived at an FB valuation of $24. http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteqfall12.htm http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteq... http://aswathdamodaran.blogspot.com/2012/08/facebook-face-plant-time-to-friend.html http://aswathdamodaran.blogspot.com/2012/08/facebook-face-pl...

therandomguy 14y ago

If someone knew it is overpriced and it will go down further they could make millions by shorting. I'm happy for the author's future riches.