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Facebook is not worth $33 billion

37signals.com

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Re: Facebook is not worth $33 billion

#71

Post by kwamenum86 »

timr wrote: post #26
spolsky wrote: post #5

I hate to leap in with what seems like an ad-hominem attack on the 37 signals, but their utter and complete misunderstanding of all the basics of business is starting to grate on me, and I'm wondering if it has anything to do with Chicago. Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the…

"Secondly, EVERY SINGLE COMPANY IN THE WORLD that has shares that trade is valued by taking the last share traded and multiplied by the number of shares outstanding. It's just the DEFINITION of valuation. It's TAUTOLOGICAL." Indeed. And Pets.com was worth $100 million on the day of its IPO. And tulip bulbs were worth more than a man's annual salary in 1637. And that house down the street was worth a million dollars l…

Value is determined by what someone- anyone- will pay for something. And it makes sense if you think about it. The goal is to find out how much you can sell that something for and it is the exact same problem as figuring out how much someone will pay for that something.

Company valuations are messier than tulip bulb valuations though. With tulip bulb valuations you are saying that since someone will pay x the bulb is valued at x. With company valuations you are saying that since someone will buy 1/n of the company for x then the company is worth n*x. This makes sense because people really want a piece of facebook and valuations do a great job of setting that price. But the price is also used to determine how much the entire company will go for, which is how the number is often thought of.

As long as the valuation goes up and you have the opportunity to sell for a net gain then it is a good investment. DHH's thoughts here are important beacause they call attention to a valuation bubble. I think the main controversy lies in his creative use of words.

Re: Facebook is not worth $33 billion

#72

Post by jacquesm »

pclark wrote: post #64
jacquesm wrote: post #59

Earlier quoted context omitted.

Yes, seriously. I can't make soup of it. What's their intention long term, everything seems to be in anticipation of what they're really going to do. In all the time that I used facebook (haven't used it in months) I had a very hard time figuring out how they were making money on or off me. It can't be the ads I never clicked and it wasn't the subscription fee I never paid.

I believe Facebook has at least 6 business models in operation today, including: * ads in margin * special paid for groups * sponsored likes (these are discussed in Kirkpatricks book of Facebook - and here: http://www.quora.com/Facebook-1/What-is-the-revenue-distribu... ) Additionally, Facebook has just launched Facebook Credits. Zynga (revenues $600M+) is their launch partner. Facebook gets 30% of their spend. I do…

I always figured they'd go and do a payment system because in facebook the 'graph' of your friends validates you to the point that doing business with someone becomes a lot less risky than on paypal, but for some reason they seem to be holding back on that.

Maybe the zynga deal is a prelude to that.

It would make good sense to do that, facebook is the closest we've got to a verified ID on the net. The issues to contend with would then of course be hacked accounts and such but that's not different from other payment systems.

Re: Facebook is not worth $33 billion

#73

Post by poet »

mrtron wrote: post #58
nadam wrote: post #31

Earlier quoted context omitted.

My gut feeling is that Facebook is somewhat overvalued at $33billion. (This is $66 for their average user.) But I don't think it is overvalued by orders of magnitudes and I think the 37signals article is very demagogue.

People are horrible at taking variables like growth into account. It isn't 66$ per user. It is 33billion/expected number of total users over the lifetime of facebook. So if you throw in rough estimates of 2 billion facebook users and give them a decade of profiting from an average user...3$ per year per user.

It strikes me as a bad plan to depend on 400% growth that's sustainable over a decade. You're right, people are horrible at taking growth variables into account. They usually overestimate them.

Facebook may well achieve the numbers outlined above. But let's not kid ourselves. People were doing the same back of the envelope calculations for MySpace when it first started to get big. I see nothing wrong with a judicious use of common sense and caution in this case.

Re: Facebook is not worth $33 billion

#74

Post by cynicalkane »

spolsky wrote: post #5

I hate to leap in with what seems like an ad-hominem attack on the 37 signals, but their utter and complete misunderstanding of all the basics of business is starting to grate on me, and I'm wondering if it has anything to do with Chicago. Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the…

It should be immediately obvious that they're comparing intrinsic value vs market valuation, so no, it's not tautological at all.

Everyone who invests should know that market value does not necessarily predict intrinsic value, and it becomes more problematic when there's illiquidity, and when only a small fraction of the company is being bought and sold. These are basics, going back to Ben Graham's famous book on value investing, and probably much further back than that.

Even if liquidity and size didn't matter, it's still a basic error to go by last share traded and claim that that represents the actual value of the company.

Re: Facebook is not worth $33 billion

#75

Post by corywilkerson »

spolsky wrote: post #5

I hate to leap in with what seems like an ad-hominem attack on the 37 signals, but their utter and complete misunderstanding of all the basics of business is starting to grate on me, and I'm wondering if it has anything to do with Chicago. Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the…

The Chicago dig seems really, really unnecessary.

Re: Facebook is not worth $33 billion

#76

Post by dhh »

spolsky wrote: post #41
dhh wrote: post #18

Earlier quoted context omitted.

1. Thanks for the word correction, updated. 2. Publicly traded companies have instant liquidity on many more shares, which makes using "last share sold" an meaningful metric. 3. When only 3% of the money a company is supposedly worth has been moved around, it's a poor indicator of what the other 97% would go for. 4. They haven't figured out how to make much profit yet. And it's still questionable whether they will. M…

2. That's just not correct. Spend twenty minutes talking to anyone who trades in bonds or equity before you make assumptions about what liquidity you need to get a good price... it's not much. Facebook trades all the time on sharespost, certainly enough to be liquid and to reach a market price. Google itself only has a tiny fraction of the shares available to the public (10% if I remember correctly) and far less than…

Also, Sharepost currently has 3 positions for sale at valuations between 33 and 44 billion. The total outstanding shares for sale represent 0.001% at 44B.

That's pretty close to the 0.000000001% that put our $100B valuation on paper: http://37signals.com/svn/posts/1941-press-release-37signals-...

But hey, you better snatch these shares up quickly. It's rare that you get a chance to a clear shot at a company where "profit is almost certainly growing at a rate that will make their valuation reasonable". How much can I get you down for, Joel?

Re: Facebook is not worth $33 billion

#77

Post by nadam »

mrtron wrote: post #58
nadam wrote: post #31

Earlier quoted context omitted.

My gut feeling is that Facebook is somewhat overvalued at $33billion. (This is $66 for their average user.) But I don't think it is overvalued by orders of magnitudes and I think the 37signals article is very demagogue.

People are horrible at taking variables like growth into account. It isn't 66$ per user. It is 33billion/expected number of total users over the lifetime of facebook. So if you throw in rough estimates of 2 billion facebook users and give them a decade of profiting from an average user...3$ per year per user.

Things are changing very fast in this industry. So even 10 years and 2 billion users are optimistic numbers. And if you take 2 billion users, most of these users are from very poor countries, it is extremely hard to monetize these users (almost orders of magnitudes harder than users from rich countries.). That said, I don't think that Facebook is overvalued by orders of magnitudes, and the 37signals article did not make much sense to me.

Re: Facebook is not worth $33 billion

#78

Post by irahul »

edw519 wrote: post #33
dhh wrote: post #18

Earlier quoted context omitted.

1. Thanks for the word correction, updated. 2. Publicly traded companies have instant liquidity on many more shares, which makes using "last share sold" an meaningful metric. 3. When only 3% of the money a company is supposedly worth has been moved around, it's a poor indicator of what the other 97% would go for. 4. They haven't figured out how to make much profit yet. And it's still questionable whether they will. M…

It's weird, it's like in Chicago they don't have multiplication or something. Oh, and New York smells. (take that!) Two of my heroes dragging discourse on hacker news into the toilet. What's the world coming to?

Both of them have some insights worth pondering, but the attacks are kinda negatively overshadowing the discussion. Joel really shouldn't have started the Chicago hyperbole.

Do they have some history or it's just impulsive?

Re: Facebook is not worth $33 billion

#79

Post by frzl »

With respect to traditional brick-and-mortar businesses the skills required to successfully build, grow, and manage a small business are different from those required do the same for a big corporation.

That is, successfully running a neighborhood cheese shop requires different skills - and attention to different metrics - than successfully running GE.

One is not 'better' or 'worse' than the other. They are simply different.

37signals is a small business. This is not a knock against them.

The knock against them is that they readily forget (ignore?) this when they point fingers at other, large corporations for operating differently from them.

Re: Facebook is not worth $33 billion

#80

Post by cynicalkane »

spolsky wrote: post #41
dhh wrote: post #18

Earlier quoted context omitted.

1. Thanks for the word correction, updated. 2. Publicly traded companies have instant liquidity on many more shares, which makes using "last share sold" an meaningful metric. 3. When only 3% of the money a company is supposedly worth has been moved around, it's a poor indicator of what the other 97% would go for. 4. They haven't figured out how to make much profit yet. And it's still questionable whether they will. M…

2. That's just not correct. Spend twenty minutes talking to anyone who trades in bonds or equity before you make assumptions about what liquidity you need to get a good price... it's not much. Facebook trades all the time on sharespost, certainly enough to be liquid and to reach a market price. Google itself only has a tiny fraction of the shares available to the public (10% if I remember correctly) and far less than…

I know you were being facetious, but agricultural derivatives are totally different from equities. But we do also have a stock exchange and options exchange in Chicago, you know.

Anyway, the primary reason that your point 3 is true is because of basic supply and demand. It is harder to buy all the shares than to buy a few. When it's perceived there's a very small number of shares available--I don't know if this is true, but it does seem like investors are clamoring to invest in Facebook--share price will be higher than if that were not the case. In particular, perceived scarcity can share prices artificially high. The idea of getting a slice of the pie before someone else does was a big factor in the dot-com bubble, for instance.

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