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Facebook is not worth $33 billion

37signals.com

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Re: Facebook is not worth $33 billion

#81

Post by charlief »

GavinB wrote: post #57
spolsky wrote: post #41

Earlier quoted context omitted.

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…

http://www.sharespost.com/companies/facebook I think the simple summary of your point is this: Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them. Facebook is worth $26 billion. That doesn't mean that buying it at a valuation of $26 billion is a good investment. Worth and my estimation of what it will be worth in the future two are different th…

That is sharespost's estimate of Facebook's worth, not what Facebook is actually worth. Hopefully if this thread was a little less heated, at the basics this is a discussion on estimating the present worth of Facebook.

A decent estimate would include the expected future worth, whether it is based on expert analysis or a market's expectations. I don't think any estimate here could be categorized as what "it will be worth in the future".

Re: Facebook is not worth $33 billion

#82

Post by InclinedPlane »

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.

Which means that if Facebook's valuation rises over the next decade there will be an even bigger gap between their user base * revenue per user than there is today. Either that or their valuation will have to remain flat for the next decade.

Does anybody else see a problem in that?

A company's valuation can certainly take into account growth potential, but when it assumes massive growth and leaves no margin bad things happen. Risk is much higher since any faltering of the company would need to be adjusted for in stock price almost instantly. If a normal company sees slower than expected growth the stock may fall a little. If an overenthusiatically future valued company sees slower than expected growth the stock may tumble by huge margins (because it's tied to the company's size 10 years from now, not today). Worse yet, if there's no margin remaining in stock price it'll be forced to remain stagnant for a very long time. This is bad for investors and bad for the company (because the use of stock as employee compensation is less potent).

Re: Facebook is not worth $33 billion

#83

Post by sbaqai »

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 present valuation isn't as important as intrinsic value if you're talking about the long term. Of course the valuation is a multiple of its trading price. With that definition, its worth whatever people are trading shares think its worth. But that's only 3% of the shares.

But what I think the 37signals post is addressing is how directly tied this valuation is (or isn't) to the company's intrinsic value. price-to-earnings, a guess at its margins, durable competitive advantage etc etc. In that sense, is facebook truely worth $33B? That's a different question than what's its current valuation. Its subjective, to be sure, but its still fundamentally different.

Its a private company. I doubt many outside the company know its financials. Information scarcity leads to pricing inefficiency. For all we know, speculators might be driving up the price to cash out sooner.

Another point I mentioned before: Everyone is incentivised to see the valuations go higher. The VC's, employees with shares, the founding team, etc. They can cherry pick talent from the competition with such valuations. Since I don't think you can short SecondMarket stock, there's no way to bring negative information into the market to keep prices rational.

To your last point, facebook has certainly figured out how to make money off its current users. But it has radically changed the underlying user-conventions to get there. It started out as a college-yearbook and photo storing site with no profit-motive. In order to become profitable, its iterated on that simple concept with such a pace that the majority of users have yet to catch on with how things have changed beyond photosharing and posting on friends walls. The majority of people have no idea what is being tracked. For them to squeeze out further revenue, it follows that more fundamental changes must take place to get there.

Whats one thing that could absolutely destroy facebook? Overnight? If they started making public which users were viewing which profiles, and with what frequency. That could kill it pretty easily, I think. Of course, they would never do it, but I think if a terrible scandal or crime occurs, involving sensitive user data, and people are compromised in such a manner, that would be a problem for facebook.A billion dollar company shouldn't be so easy to kill.

Re: Facebook is not worth $33 billion

#84

Post by iampims »

raheemm wrote: post #28
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…

What does Chicago have to do with FB valuation? KTHX. DHH makes a good point though - what are FB's profits/profit projections? No one knows. Assuming its $200M, how the hell can FB be worth $33B? That's all...

It could well be that "only" $200M in profits is the result of spending $$$ on R&D and product development (FB Questions, FB Places, FB Credits), which could lead to a massive amount of cash flowing in shortly.

They've massively invested in infrastructure, which has certainly lowered profits. They could very well start benefiting from this as soon as next year.

Without information, though, it's all speculation.

Re: Facebook is not worth $33 billion

#85

Post by stevefarnworth »

Argue about it all you want, but I will never accept a company's valuation based on second market stock. Only when the stock is publicly trade-able and market forces determine the price to be paid will I accept a valuation.

And a valuation at, what, 33x revs (on a good day)? I'm sorry, but gambling that hard on a web company on the basis of "potential" profits is not good business (I don't know whether it's a Silicon Valley thing or not), if you know, they can be bothered to monetise it before the next website du jour comes along.

YouTube was "valued" at $1.6bn, and has really struggled to make money. I'm not denying that it wont pay off for Google in the long run, but when Facebook floats, you think that investors will stick around if they struggle to monetise and fail to bring profits and revenues to a 1/5 or a 1/10 of valuation in 4/5 years?

Re: Facebook is not worth $33 billion

#86

Post by krschultz »

spolsky wrote: post #20
seldo wrote: post #13

Earlier quoted context omitted.

A dime per user is nice and all, but they need to make 20x that for a billion dollars in revenue. That's still only $2 per user, but a lot harder.

They're almost certainly making $2 per user. Another dime is gonna be easy.

I think their CPM is in the $30-$40 range, but the key missing piece of information is how many views they get per user. I know my Facebook use has gone from multiple views per day (20, 40?) to 1 page every other day. Still lets say each user looks at Facebook twicer per day, each user is about 1/2 a CPM per year, or $20 revenue per year.

But CPC, well I've never clicked on an ad on Facebook in my entire life.

Re: Facebook is not worth $33 billion

#88

Post by jbeda »

jacquesm wrote: post #32
ericb wrote: post #14

Earlier quoted context omitted.

I agree, but as an aside, is it possible Netscape merited that valuation? Was Netscape's a squandered opportunity, or the most likely outcome. I mean this in the sense of odds--was the valuation wrong because the odds of success were really so slim, or are we calling the die roll of a hard six inevitable after the fact? I bring this up because I had a similar feeling to what you describe about Google around its secon…

Google at least has a business model, I can't say I can actually detect one in the case of facebook. As for netscape, yes, in part it was a lost (or destroyed, more likely) opportunity, but at the same time even if they had continued to be successful their valuation at the time was right up there with far future science fiction.

Honestly, you have to be blind not to see the business model and assets that they are building.

Go to http://www.facebook.com/ads and take a look.

You can target ads at "all doctors under 30 in the chicago area that went to a ivy league school". This type of targeting can lead to huge CPMs.

One example of where they could go: they are one cookie away from a significant branding ad platform.

Another idea: advertise on keywords in activity streams. Tie this to the branding ad network above.

Update: Not clear why this is getting downvoted. These are two huge opportunities for Facebook that could easily justify big multiples. And people said the same thing about Google (no serious business model) before it went public.

Re: Facebook is not worth $33 billion

#89

Post by cromulent »

dansingerman wrote: post #44
danielnicollet wrote: post #40

Earlier quoted context omitted.

it's "a meanningful metric" not "an meaningful metric". Please spell people. This is not SMS!

I think it is always wrong to point out spelling mistakes, except in posts about spelling mistakes.

Especially as many spelling mistakes are actually typos.

Also, "meanningful" is an excellent example of Muphry's Law.

http://en.wikipedia.org/wiki/Muphry%27s_law

Re: Facebook is not worth $33 billion

#90

Post by shadowmatter »

bhickey wrote: post #45
spolsky wrote: post #20

Earlier quoted context omitted.

They're almost certainly making $2 per user. Another dime is gonna be easy.

First of all, Joel, it's THEY'RE not THERE. ;)

Hey, lay off man! If Chicago doesn't have to teach multiplication, New York doesn't have to teach grammar, alright?
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