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?
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.
> 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!'
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), 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.
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?
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.
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.
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.
This is not an appropriate use of a PE multiple because different companies have different growth rates at various stages. The earlier the life cycle, the higher the PE given potential growth later on is much higher. This post is actually pretty misleading and gives people the wrong idea about how PE multiples should be applied.
You're right that different companies have different growth rates at various stages. But, to me, it still doesn't add up.
From another comment I made below: "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), 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."
Neither P/E, nor PEG are useful metrics when dealing with a young growth company.
Consider this: There was a time when Yahoo! had many potential customers and a substantial business and technological lead over the competition, but no positive earnings. The same was true more recently of Genzyme, currently a multi-billion dollar biotech company. Would it be reasonable to assign zero or negative values to such companies? Of course not.
And what happens when a high-tech growth company climbs up from a small negative earnings to a small positive earnings? Suddenly instead of having an undefined P/E, they have a very high P/E. This is reasonable. A solar power company with 500m in sales and 1m in earnings that had 200m in sales and hugely negative earnings in the previous year could very well be worth over a billion. If the market gave it such a valuation, gawking at its P/E of 1000, and then applying the same P/E to an established company like Kraft would just be a waste of breath.
I believe the valuation that Facebook is running on is predicated on an expectation of sustained future growth. Apple is a fast growing company, but I'm not sure that you can expect them to continue to grow at their current rate for as long as you can expect facebook to continue to grow at.
The Smartphone market is growing very fast, but Apple have competition in this market now that Android has started to grow. I'm not saying Apple are loosing much marketshare, more than while a year ago it looked like they going to gain marketshare in a market that was growing, while now they are holding their own in a growing market.
Facebook doesn't really have any serious competitors - myspace has slowed in terms of growth and is possibly shrinking while linked in are aiming at a different market. The only thing even on the horizon that could undermine them are federated social networks - and its far from proven that they are what consumers want.
Its a high valuation and does smell like a bubble, but I wouldn't be surprised if Facebook hit $100 billion when they IPO assuming they can get to a billion users by then.
P/E should not be considered in a vacuum. The high valuation probably exists because there is a large expectation of earnings growth. I don't know if we can eyeball a PEG on FBOOK yet as we don't have the proper data but it's probably much different than AAPL (and especially T!), at least in the eyes of the investors.
* Facebook is effectively a monopoly - when regulators will start limiting its growth?
* Chinese market - without it Facebook will need to expand interplanetary by creating colonies on Moon and Mars.
* I think with 90% probability, that there will be another opportunity to buy FBOOK shares under $50B valuation after IPO (movements in public stocks are 80% general market sentiment and only 20% company performance).
It is confusing that such an obvious over-valuation can be taken seriously at the end of such a long and deep recession. The valuation is straight out of 1999, but back then USA was undergoing the longest economic expansion it had ever known.
Things (shares, companies, objects, currencies, oppurtunities, gold) are worth what people will pay for them. That's it. There is no objective "value" other than that.
A company is worth the expected net present value of all future dividend payments. If a company is both unsexy and well-managed, you may be able to buy its stock at a very good price, and then collect a fat profit of the dividends.
That's their price, but price and worth are different things during periods of irrationality. I think it's pretty clear that people are projecting what Facebook will be worth when it hits a Microsoft 00s style plateau, and deciding on what the price should be now to reflect that.
After all, Yahoo's market cap peaked at $152 billion and Google's IPO was 1/6th today's price.
Interesting. Just went and looked and was surprised to find that only one company is valued more than Apple in the US markets. Exxon Mobil (382B) > Apple (307B).
I interpreted this graph to mean broofa was implying that Facebook in the long run could achieve that kind of valuation, not that there were other companies with that valuation now.
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?