The Second Coming Of The Internet IPO

Most of what I've been saying recently about valuations here at AVC has been negative. I think we are in a "focus on the upside" phase in the web investing sector and I've been pretty liberal with my thoughts on that.

But when friends have privately asked me whether they should take some of the Facebook shares their Goldman representative has offered them, I mostly tell them I think they should. I don't think anyone should bet their net worth on Facebook at $50bn, but I think it is a pretty good bet that Facebook will one day be worth more than $50bn. Is it today? Hard to say. I don't have access to Facebook's P&L, cash flows, and balance sheet. But from what I have heard Facebook should do between $1bn and $2bn of EBITDA in 2011 and possibly more. 25x to 50x EBITDA for one of, if not the premier Internet company in the world is not crazy. And if you just think how much market power (i'm talking driving traffic, audience, brand, attention, value) Facebook has relative to the other Internet services which are valued well north of $50bn, I think it is pretty obvious that there is more value to be created in Facebook stock.

My friend John Battelle has similar thoughts on his blog in a post everyone interested in the second coming of the Internet IPO should read.

How do I reconcile these conflicting thoughts, that the web sector has gotten overheated and that the coming Internet IPOs might in fact be good buys? Well, to be honest, I haven't completely reconciled those thoughts. First of all, we don't know how these deals will be priced. Will Facebook shares be offered to the public at $75bn, $100bn, even higher? We just don't know. And how will Groupon, Demand Media, LinkedIn, Skype, and other offerings be priced? Don't know yet.

But it is very possible that some or all of these deals will be good buys even in the face of an overheated valuation environment. The public Internet names, most of which went public eight to ten years ago (or more), are mostly carrying full but not crazy valuations. If this new crop is priced off of those comps, then they could be worth buying and owning. And, as John points out in his post, if these companies contiue to grow rapidly and throw off ever larger amounts of cash, then they could easily be worth well north of what they are worth today.

In the spirit of complete transparency, I do not plan to purchase any of these offerings. I have plenty of personal exposure to the web sector right now and am adding to it every day via our firm and other private deals and funds I am part of. I don't particuarly like to buy and own public stocks unless we are in a really down market and I see unbelievable values. So I am not going to be calling the banks and asking for allocations. But that doesn't mean you shouldn't. But whatever you do, make sure to do your work and understand what the price is and that it makes sense. Blindly buying something just because it is "hot" is never a good idea.


Comments (Archived):

  1. William Mougayar

    As long as it’s the companies with real revenues and sustainable models that are the ones going public, that’s good and that’s different from 99-00 when IPO’s were underwritten based on speculative models and imaginary revenues. The public markets always calibrate themselves at the end. I know a thing or two about this as well because I instigated the B2Index (on Business 2.0) back in ’99, the first trackable Stock Index of Internet companies and was watching the IPO pipeline monthly at a time where it was healthy quantitatively speaking.I am torn as well about what to make out of this conundrum of high valuations, but welcomed activity. But I’m leaning towards more optimism because I don’t believe we’ll make the same mistakes as ’99-01, but perhaps different ones. 

    1. markslater

      haha thats funny william. You might not make the same mistakes but jo public sure will. Look at the venture world – the thundering herd is at it again and they are a microcosm (albeit alot more sophisticated at it) of joe public – wait till the word filters down…..Goldman and others are dialing for dollars as we speak…….you watch. It WILL happen all over again.

  2. howardlindzon

    Pass the ‘oreos’

    1. Donna Brewington White

      Ha!Not throw them against the wall?Maybe, not yet.

  3. ShanaC

    What about the possibility they stay private and disclose financials?

    1. andyswan

      Good Q Shana, Facebook is as close to public as a company can get without being listed on a traditional exchange.Bryce has an interesting take:

      1. ShanaC

        I saw that post earlier. I keep thinking (but I don’t know) that by staying private – they may not need to be GAAP compliant even if they are fully disclosing their finances. There are some major benefits to just that.

  4. Edward Harrison

    Fred, I write an economics and finance blog and follow your commentary. I was at Yahoo during the last tech bust and I look at the valuation issues now as symptomatic of the mid-to-late cycle part of an economic cycle. The types of pressures we are seeing in commodity and food price inflation as well as in Emerging market shares adds to my sense that the economic cycle is now well-advanced. That has me worried because we just left a very difficult financial crisis and we are now ramping up in a way that is reminiscent of irrational exuberance, something that Greenspan uttered a full 5 years into the 1990s business cycle.My takeaway from all of this from an economy-wide perspective is that this business cycle is going to be short. It is as if we are in the equivalent of 1996-97 or 2005 from the previous cycles. I would love to know if you have a view on this from a tech perspective.Cheers.Edward

    1. kidmercury

      the ending this time around will be different IMHO as the debt levels are the real problem. i suspect people will run from bonds and USD into stocks. i think this time the bust will manifest itself as dollar devaluation outpacing stock price appreciation.

      1. Edward Harrison

        kidmercury,My greatest concern here is also the debt you mentioned. I recently wrote a post on my 2011 economic outlook. I am cautiously optimistic but I am concerned about the secular trend of rising indebtedness, now in both the public and private sectors in developed economies. If the developed economies don’t use this upturn wisely and reduce household debt levels and increase private sector savings, the next downturn will be very nasty in my opinion.If you look at household debt as a percentage of GDP in the United States, it has more than doubled in the period starting with the bull market in 1982. During that time, policy makers were able to counteract bubbles by lowering rates. The side effect, of course, was higher debt levels. We are at a point now where rates are already at zero percent. and debt levels in the household sector are still very elevated. To me, this is worrying. So when I see these prospective IPOs at huge valuations, this is what is in the back of my mind. It sounds like you have those same concerns.

        1. Donna Brewington White

          Wise words, Edward.Any idea as to why more people aren’t seeing this? As much as I hated the recent financial crisis, I thought that it would at least be a wakeup call and we (whoever “we” is) could gain wisdom from it. I am not a financial or economic expert, but just from a common sense perspective it seems clear to me that problematic patterns are being perpetuated.

          1. Edward Harrison

            Economists deal in “flow models”. That means they are fixated on driving growth and preventing recessions. None of the economists and policy makers at the center of this crisis has talked about the need for sustained deleveraging. For example, household debt to disposable income reached 130%, is now 120%, up from 75% in the early 1980s. But, policy makers are more concerned with above 16% underemployment and goosing demand to get those numbers down than debt or savings.The problem is that it creates bubbles. I think many of these pre-IPO companies are the real deal, further along in their evolution that the original dotcoms. It’s more like when Intel went public or Microsoft. So many of these companies are real businesses. But 25-50x EBITDA is a scary number and it says that we are in exuberant territory – something I see as very much a reaction to zero rates.The reality is that no one wants the pain that deleveraging entails. We have just seen what it can do in 2008-2010. People want to move forward and politicians, Fed officials and policy makers are obliging them. When the next downturn comes, if we still have 120% debt to disposable income and rates are still at zero or 1%, we are going to be in big trouble.


      The pressure in food & and commodity has to do with a weak dollar, and a USD carry trade flowing into emerging markets.. The US is effectively exporting inflation to sustain its manufacturing growth, and competiveness.If, and when China agrees to start devalue the yuan faster, and global trade accounts between the US & China rebalance, inflationary pressures will ease as the USD rises, and hot money cover their carry trade positions in hard assets & commodities.All the central banks measure M2 & M3, so they have a good idea on the velocity of their currency.

      1. Edward Harrison

        I agree with you that the carry trade is responsible for much of what we see in emerging markets. But, the dollar actually isn’t weak except against floating emerging markets like Brazil or Chile. if you look at the dollar index (DXY), it is well off lows from November and was at its weakest in April 2008.Again, my larger worry is that much of this activity is a signal that the cycle has become well advanced. Brazil and China and other EM markets are tightening, we see really high tech valuations, a second IPO wave. a record of high yield bonds issued (an area I once worked in). This is all very symptomatic of the mid-to-late stages of a cycle AND we have rates at zero percent in the US.


          I’m bullish for 2011; mainly in resource plays.2012 has a higher probability for a huge markets pullback if Greece shows it can’t balance its book even in a period of Austerity. Then the dominos fall.The known unknown is China. She’s been shown to intervene in markets to maintain global stability. So she may be able to help the markets gracefully degrade, unlike a Lehman collapse.But I”m not going to worry until 2012.p.s. All currencies are weaker, if you compare them to the price of gold. The USD more so.

          1. Edward Harrison

            Agreed. 2011 is looking pretty good right now. I am cautiously optimistic both on the economy and shares. As to the Web 2.0 companies, it does sound like these are the Amazons and Yahoos of the world which went to market earlier in the cycle. We are not seeing yet. And that’s a good thing.

          2. JLM

            I applaud your excellent and very insightful comments but I think 2011 is going to be a disaster of gargantuan proportions lead by the last vestige of the municipal and state “Emperor’s New Clothes” being eliminated.I see at least 10 States and 5 huge cities living under a bridge by year end.The trolls will be pushed out and replaced by California and Illinois.


      web 2.0 is at the tail end of its bubble. It started in 2007 when LP were flushed with cheap money during the real estate bubble, and had to make use of it, so they put it into high risk vehicles like venture funding. 4 years later, these funds need to start exiting their positions, to pay off the LPs.So now you have inflated IPO prices to justify irrational exuberance from 2007.It’d be unwise to generalize web 2.0 IPOs to macroeconomic trends, given the latency inherent in the VC model.I

  5. LIAD

    Much as I dislike their service, policies and attitude – I can’t see how FB does anything other than sky rocket in value.They have a lock on the mainstream social graph, account for 25% of all US page views and haven’t even began to leverage the real advertising and commerce opportunities staring them in the face.Having now given the bankers a seat at the table, they’ll be forced to become a lot more aggressive. They will go from (superficially) benevolent dictators to tyrannical despotic ones.Facebook’s dominance = 1 BIG MEH.

    1. shagNYC

      LIAD, the reason I am slow to buy into Facebook is for exactly this reason “they haven’t even began to leverage the real advertising and commerce opportunities staring them in the face”… why? Everyone thus far assume they will do a great job at it later, but we all know what happen when we…

      1. LIAD

        Zucks is an innovator at heart. Not a businessman. Thus far he’s had complete control of the board and can veto the revenue strategies he funds overly intrusive. As more of wall street gets involved i think he will find himself outmanoeuvred and be forced to embrace the advertising and commercial opportunities he has long seemed to detest.

        1. JLM

          To buy FB and not be prepared to follow the instincts of the founder is insane. If ever there was a cult forming — a la Steve Jobs — this is it. It is incredibly interesting to watch from the sidelines.Most of what I see about Z is not very appealing to me. But I am a bit critical by nature.Having said that, there is something interesting about his financial conservative nature as reflected by his housing choices and his seeming restraint personally.I admire that particularly as most other data indicates he is a bit of a jake leg.

          1. LIAD

            I’m undecided whether his new rented house is quirky and cute or conclusive proof that he’s a nut job.Whilst without doubt Zuck is the core of FB’s success, I can’t see how the bankers, with their crack-like addiction to the pay window, can let his utopian, cuddly-capitalism ideals get the better of them making cold hard cash.

          2. Aaron Klein

            Thanks, JLM – I needed something for the morning laugh and this filled the bill. 🙂

    2. Mark Essel

      Isn’t their revenue stream highly volatile though? Certainly if they become too pushy with selling user attention/information I would expect company value to nose dive.

      1. LIAD

        I can’t see main street leaving FB for reasons of privacy concerns or overly intrusive advertising. they have extraordinary lock-in.when the masses rise from their slumber and embrace something – I think they buckle down for the long haul.AOL email address anyone?

  6. Tom Labus

    I don’t know if it’s because I lived through the first go round or the model of some of these cos but when I hear about new IPOs my first reaction is to look for cover.

  7. andyswan

    Facebook could TANK 90% and still be 4.5x higher than the price most of us said Zuck was an idiot for turning down a few years ago.

  8. JimHirshfield

    What’s your all’s reaction to Alan Patricof’s piece? I have to agree with him that the IPO process is broken.http://www.businessinsider….

    1. Hank Williams

      Alan is clearly correct. The idea that IPOs should only be for companies well north of 250m in revenue is insane. You shouldn’t have to be Sears, WalMart, or Intel to do an IPO. Sarbox needs to be revisited so that earlier stage companies can afford to go public and so that there can be enough research to make early stage public investing viable for regular folks.

      1. William Quigley

        I am a venture capitalist and I agree Hank. In fact, look at the class of 2007 Nasdaq tech IPOs. Most were sub $100M in revenues and many were in the $60M to $70M range. Many of these companines now have $1B to $5B market caps. I don’t know where this silly belief originated from but it is time it was dispelled with facts…

    2. fredwilson

      I’ve written about this a fair bit. I like high hurdles for IPOs

  9. William Mougayar

    Where does this leave Twitter? Do you think their lack of substantial revenue and cash positivity would exclude them from joining this party, or could they go IPO “as is”. I realize it’s a loaded question, but what the heck- let’s all have a party.

    1. fredwilson

      Sorry but I don’t think I should address this question

      1. William Mougayar

        It was a good try…on my part 🙁


      Twitter’s story has only just begun. Their traffic will eventually exceed facebook’s.

  10. kidmercury

    lol….oh boy…..still desperately clinging to the stock market…….lolthe casino is fundamentally broken. the economy is broken. many citizens of fredland may find this easy to ignore as they benefit, at least temporarily, from inflationary monetary policy, but we are reaching the end point of the inflation game soon. then what will you do?there will be no recovery until debt levels are lowered, the regulatory environment is significantly corrected, and monetary policy is reformed. until those structural problems are solved, almost all growth will prove to be is true that those problems require fixing government — or that these problems are largely political/governmental in nature.ignorance is futile. only the truth can set us free.

    1. markslater

      i side with you Kid. Goldman Sachs is calling people to sell allocations?!!! – it blows my mind that people would even take that call.You are either in the game of creating value, real value or you are not. buying in to what a snake oil salesman claims is “upside” given this day and age – all the technology at our fingertips and against a backdrop of unmitigated greed and loss – is tantamount to saying “yes sir may i have another… yes sir may i have another….”Get off that goldman bus – its bullshit. – your not close enough to ZERO – get out there and create something.

      1. yofrez

        So how do you invest your savings given inflation? Do you put it under your mattress or reinvest it in whatever value creation enterprise you are apart of? The stock market has produced longterm returns and created substantial value for many people throughout the years. Just ask Warren Buffett.

        1. markslater

          warren buffet? you are kidding right?in my humble opinion the capital markets are chronically and systemically broken. And while there may be pockets of safety for parking capital, doubling down on a flawed investment construct is financial suicide.any sound metric for the economy tells a worrying story – its not a crisis – the system is broken.there are many out there (espcially i would guess onthis blog) that might be sophisticated enough or nimble enough to navigate to a profit – but Joe public – in who’s hands this will all end up – is woefully over leveraged, and will be caught again with the bag when this mirage of irrational exhuberence disapates.facebook no doubt might be a good investment – the marco economy is not equipped to handle the story that the likes of Goldman will craft around it.

          1. JLM

            I have always been fascinated by the Charles Schwab story wherein Chuck re-invented a bloated industry into a modestly streamlined transaction platform whereby, initially, the cost of a transaction was stripped bare of the cost of “advice” and was marked to market to the cost of the actual transaction execution.The back of house drove the pricing rather than the front of house.I have always wondered why a fairly large public company has not created its own trading platform allowing its own shareholders to auction their shares without the intrusion of market makers and short sellers.At the end of the day, the public company bears all the costs of compliance and has to pay everyone something — market makers, registry agents, etc.Why not just cut out all the middlemen and deal directly with the public? They are after all your own shareholders mostly.

          2. PhilipSugar

            Could not agree more.As we’ve discussed before I’m ok with covered shorts.But Naked Shorts, Synthetic Share Derivatives and all other forms of bullshit???? Nope.And I’d go a step further and put protections in for shareholders as well.Bypass SOX and decree that any officer making more than $500k a year agrees that by the very nature of their pay they know what’s going on and agree to a clawback of the amount above that during a restatement.Require any entity that buys for another entity (i.e. mutual fund or hedge fund) have a site that allows those shareholders to vote pro-rata to their holdings.Require a shareholder vote each year to approve board composition, and in the case of a super-majority reject officers pay.

          3. JLM

            There is a further analogy to the relationship that airlines have w/ Kayak, Expedia, Orbitz and their own websites.SW Airlines has gone it alone on many of these discount sites.Remember when travel agents used to book airfares and get a huge commission?

          4. PhilipSugar

            Look at my post on Groupon.I think it faustian bargain to let somebody take over any part of your revenue stream.I also agree that eventually the market gets flattened. (I wouldn’t even know where to find a travel agent, and I used to rely totally on my travel agent Odelia)I’ve said before the one thing that irks the hell out of me with internet guys and investment banks, is when they think they are the masters, not the servants to those who produce, i.e. actually delivering product or a service.To try and take the lions share of the profits makes you a leach that sucks the blood from its host. I lament that most of the best and the brightest aspire to this goal and that at the high end, and the welfare state at the low end is killing the solid middle.Short term if you can get in the middle of the transaction you can extract serious profits. Long term the internet disintermediates everybody but the end buyer and the seller. The only value middlemen get is a tiny percentage over their costs. This is where Fred and I have argued over affliate fees.

          5. JLM

            I agree more with you than you do with yourself. LOLThe Internet is making the middle disappear. As it should.

          6. markslater

            true dat

          7. manyam mallela

            So True. That single nugget of insight can lead entrepreneurs to create highly disruptive companies. Thanks JLM for articulating that so well.

          8. markslater

            be great if that began to occur with the political process JLM. i’ve always felt (ignorantly i admit) that legislating by proxy was for when we were tooling around in horse and carts.

      2. raycote

        “Get off that goldman bus – its bullshit.”HOW TRUE – THE PROBLEMGoldman and friends own the bus and the regulatory system that governs all the buses. No-one is get off the bus untill it hits the total dollar hyper-inflation wall, followed by seriously destructive deflation!

        1. fredwilson

          just to be clear, i don’t currently do business with goldman andhaven’t in over a decade

  11. mike gilfillan

    I predict Facebook’s IPO will be this generations Netscape. Maybe they’ll become the next Google, maybe they won’t. Either way, their IPO is sure to open the floodgates to others, which will in time bring lower and lower quality offerings.This is the cycle of many speculative free market endeavors. 10 years is enough time for those (including John Q. Public) who missed the last round to decide that “this time it’s different”.

    1. zackmansfield

      interested in whether or not you read Batelle’s piece that Fred linked to.Facebook and netscape couldn’t be more different in terms of financial fundamentals.

      1. mike gilfillan

        I did read Batelle’s piece and agree that FB has the beginnings of the fundamentals that Netscape didn’t have, but until FB can charge its users for the service (ie: subscription), then it seems they are just another spin on the ad-based model of selling a limited inventory of rotating ads to eyeballs — ads that are interruptive to the flow of human conversation — the online equiv. of putting an ad in someone’s Christmas card or personal mail / correspondence. They probably have room to evolve this model, but that’s all just speculation at this point. Yahoo and Google have tried to evolve their models too — with mixed results.Regardless of my opinion of FB, I don’t believe human nature will change much even though technology does. Like countless industry cycles before it (tulips, rail, electricity, radio, etc), others will follow the industry leader to the “pay window” and the valuations will go up while the quality inevitably starts goes down as more and more people want a piece of the action (and others are willing to “sell” it to them). I think the process is already in motion as evident of Fred’s commentary on increasing VC valuations.I believe it’s going to be a Web 2.0 bubble this time.

        1. Aaron Klein

          There’s no way Facebook is ever going to charge a subscription fee.Everyone but the influencers would leave and then the influencers would since there would be no one to influence.That’s a 100% ad-driven company, whether it’s traditional ads, social commerce or local.

  12. Elia Freedman

    I, too, have been wondering about this issue as I read more investment posts and see more crazy valuations. I, personally, think they are two different trends. For lack of a better term, we have the micro trend of a few solid companies becoming ready for IPO. Excluding Groupon, most of the firms you mention have been around for a while. Nine of these companies strike me as that different than the companies that used to go public before 1995 and, my guess is if there had been any IPO market at all in the last decade, most would already be public.On the other hand there is the macro trend. A few good companies are going to go IPO and the investing market ticks up as lots of me-too, questionable start-ups get ridiculous valuations. While every investing book says buy low, sell high, the reality is that this rarely happens. I think we are seeing the same thing all over again.

  13. im2b_dl

    imo – the “giants” are extremely big to turn the sharp corner of a completely different kind of interface and revenue/search/advertising model coming. Facebook is in that giant category.

  14. adamwexler

    i’ve been telling others 2010 will go down as the ‘Year of the B2C IPO’ … got a feeling we might see ~5 of those plays go public before facebook (linkedin, groupon, skype, zynga, pandora) as they’re trying to beat facebook to the punch before facebook steals everybody’s thunder. it also doesn’t hurt that facebook is trying to hold out, but that’ll only hold things up for so long.

  15. Adrian Meli

    Certainly, if these companies continue to be dominant then they could easily be worth the money. Facebook, especially. It is tougher to see things like Groupon being worth $15B as I am not sure how big their moat is long term. Woot used to have an unbelivable growth rate and then the novelty wore off for instance. That said, I missed Google myself! – Adrian Meli

    1. Aaron Klein

      Reid Hoffman says the moat is internal technology for data analytics.I’m not sure if I buy that yet but best of luck to the Groupon crew.

  16. Harry DeMott

    The big difference these days is that the companies being bandied as public candidates are all leaders in their field (some wildly so) and are profitable (again, some of them wildly so). They have scale and are permanent members of the business community (i.e. I doubt Facebook is going to flame out and disappear anytime soon).When you couple those facts with near zero interest rates – so almost no real return on fixed income securities – and with mosr of the companies that are publicly listed having almost no organic growth – you have a recipe for some tremendous interest funneled into a small number of companies.Look at the past year in the equity market. Apple has done great – great company with a growing business. Netflix has done great – again, gerat company growing fast.For the most part there are few of these and a lot of $ looking for returns above the rate of inflation (the government tells us we don’t have any, but come on, $3.75 for gas – food prices up, I could go on).All of this leads to a tremendous demand – and with limited supply you are going to get far higher prices (maybe higher than justified long term) – and the IPO process is all about restricting supply.

  17. George A.

    How do you reconcile? Easy, in the first you are a buyer, the latter a seller. You might attempt to be objective, but in the grand scheme, we all allow personal objectives to influence our view of the world

  18. Boris Fowler

    I am interested to see how much FB will be as soon as it is made available as an IPO. I’m sure it will be a good buy and that it will sky rocket. But, until then, we wait…

  19. JLM

    When folks — very, very, very smart folks — are throwing around 25-50 x multiples of EBITDA (not earnings, mind you, EBITDA) as being “…not crazy…”, I am just absolutely flabbergasted.Not saying they are wrong, mind you. Just remarkable multiples which would have Messrs Graham and Dodd spinning in their graves.Having said that, it is also difficult not to embrace that there are companies — company “states” in some instances — out there that are clearly the best of breed. Who have achieved critical mass. Who can simply buy or punish their competitors. And for whom access to capital is not an issue.Such best of breed companies merit a bit different view of their long term prospects. Does that view stretch to 25-50 x multiples?I think not though I am perfectly comfortable being totally wrong.Last word from me is that behind those 25-50 x multiples is also a fixed income market which is not much different in the returns that they can deliver.So, do you like FB at a “perceived” 2% return or do you like the US Gov’t at an absolute 2% return? Not much difference really.

    1. Aaron Klein

      The interesting thing is that the multiple is persisting beyond Facebook being acquisition material.There are times when a multiple that high might be justified because of the strategic value to a set of potential acquirers.Now that it’s clear that Facebook will go public and be an operating company for the foreseeable future, you’d think the valuation would return to an EBITDA basis, but the billion dollar hypergrowth expectations are a little over the top for that to be built into a 50x valuation.

    2. andyswan

      Well JLM to be fair to FB multiple we’re not really talking about a forward multiple.Baked into the cake are many, many, assumptions about the ability of FB to monetize the powerful river that they control.The real question is….are those assumptions correct? It reminds me of projecting tax revenues….it all sounds great on paper until you realize that your tax is crushing the very activity you were projecting upon….If FB users start to feel “taxed” by the monetization schemes, they can leave even faster than they showed up. Part of the reason I’m so excited about my very early days investment in backupify LOL.

      1. JLM

        I hear you loud and clear.It is perfectly fair to relax the rules a bit when you are talking about forward looking multiples but when the assumptions are so broad it is difficult to believe we are still in the realm of “financial analysis”.When you leave the realm of financial analysis and enter the realm of financial mojo it always seems to me that you should be dragging all the “knowns” — like depreciation, interest, taxes — into the unknown.

        1. andyswan


      2. PhilipSugar

        Well said.I think the challenge is when you are providing a service for free where the consumer is using it for its value, but she is not looking to engage in commerce as a result of the service it is very hard to monetize.In retrospect (showing I did not have the vision and might not here) I see how Google and Groupon have extracted so much cold hard cash. Both provide a valuable service to consumers who are looking to purchase, and they are able to essentially take a nice fat cut by bringing a buyer to a seller.However when you are talking about a service like Gmail, HotMail, Photobucket, etc the dollars haven’t translated because you are not going there for the purpose of buying anything ever. You are going there for a different purpose. Yes you can serve up ads but the CPM’s are low because unless you make them really intrusive people very quickly learn to ignore them. For instance if you offered me a bottle of Pappy right now I couldn’t tell you a single ad that Gmail has served up.

        1. andyswan

          Yes.For me, the underlying question for every “app” or “company” (is there adifference anymore?) is: Is this monetized by transactions, and can itCAUSE transactions? If yes, “I’m listening”.

          1. PhilipSugar

            Good way to elegantly simplify my statement.You can grow very quickly if you can provide value. I don’t dispute Facebook’s value for one second. Have all the communication value they deliver for you to your network for free? That is one hell of a deal for the consumer. Add in the viral aspect tell me to go to yours, so I build mine, kick ass.Nothing in the above however is focused on monetization, you don’t go there to research a camera, or look for a “deal”.Speaking of which I totally see the value of backupify but am not sure on the monetization aspect 🙂

          2. andyswan

            LOL I thought someone smart might catch that.

          3. Dave Pinsen

            That’s part of the potential of Portfolio Armor: the app shows an investor the optimal way to hedge, and with that info the investor is ready to make a transaction (to buy the optimal contracts to hedge).

          4. JLM

            Not every painter is going to open an art gallery as a means of peddling paintings.Not every app developer has to start a company to deliver his app to the marketplace.The app is going to partially go the way of the patent.You develop something and somebody else sells it and pays you a royalty.

        2. ShanaC

          Facebook still isn’t embracing “affordance advertising” where concepts are introduced to the buyer. Just because I am advertised to now doesn’t mean I will buy now. it means I have an idea in my head about the product.Case in point: I’ve been seeing American Apparel ads online for about two, three weeks for a dress. Took all that time to buy the dress, plus I never clicked through. The advertisement still worked – and that is where facebook is missing out on the money

          1. PhilipSugar

            Comscore says Facebook currently serves up 1 out of every 4 display ads. They also say that the average consumer is “delivered” 6,000 of these ads a quarter (that actually seems low). They say the market is about $8.8B for 2011 which then makes sense on what people are saying about FB revenue.I’m not saying its not a good business….but eventually trailing P/E’s end up in the teens….that’s a nice big company, but there are some risks….see what happened to ad spending in 2008.Companies are always going to spend money when you get in the middle of the transaction. I can just hear the Priceline rep: “you mean you want no revenue, instead of some revenue?”The farther away you get from that, the less power you have.

      3. Dave Pinsen

        So Backupify saves all of your Facebook data. Let’s say FB gets pressured to monetize aggressively in the near future and FB users start to feel taxed — do you anticipate that a new, ‘low-tax’ social network site would be able to integrate with Backupify so it could offer one-click transfers of account info from FB to its site?

  20. Brian Lang

    I just read a corresponding argument supporting your position by Steve Case. See

  21. Joe Lazarus

    I don’t pretend to understand valuations, but if Facebook is doing $1-2B EBITDA today and you like those multiples, I think there’s a lot of room for those numbers to improve. I’ve done a fair amount of advertising on Facebook. Their ad systems are completely under optimized relative to Google AdWords and most other large ad networks. The team of people they have working on that side of the business is still pretty small. Zuckerberg is focused on user growth & retention, not advertisers (rightfully so, at this stage). I bet they could double revenue by just putting a few more bright engineers on the ads team and providing us with some better advertiser products and tools.

  22. paramendra

    By 2020 max Facebook will have hit $200 billion.

  23. Mark Essel

    I’d be more inclined to believe in Facebook’s valuation and enduring value if they backed their offered shares with Gold.

  24. Greg B

    When I work out current valuation vs. current top-line revenue or EBITDA, in multiples, I use a common sense strategy, equating the P/E roughly to the percent growth anticipated over the next few years. Anticipated earnings growth of 15%/yr. compounded fetches roughly a 15X P/E. So in FB’s case, i ask myself the following questions:A) will the FB userbase continue to expand at 50%/yr? I actually think we will soon see a topping of users, and defection to social networks intended for more specific populations. I would hope that CPM and CPC goes up for them, but I don’t think the net effect will result in 50% per year earnings growth.B) Will FB find better ways to monetize its ad revs per page? I don’t think so. Users are already trained against looking at FB ads, even though they have done a much better job recently at directing them toward the users’ interests. What other revenue sources can it pursue besides ads: Maybe Facebook shirts.C) Will FB be bought by someone else? Who??I think about how MySpace was the Internet darling, and how it is now almost a footnote. I wonder what’s the next web “It” stock.IMHO, Greg

    1. JLM

      I personally am going “long” Greg B.

    2. Dave Pinsen

      “When I work out current valuation vs. current top-line revenue or EBITDA, in multiples, I use a common sense strategy, equating the P/E roughly to the percent growth anticipated over the next few years. Anticipated earnings growth of 15%/yr. compounded fetches roughly a 15X P/E.”That’s essentially the PEG approach I mentioned in response to Guillermo Ramos’s comment elsewhere in this thread. Hadn’t seen your comment yet when I wrote that.

      1. Guillermo Ramos

        There are a lot of valuation techniques and nobody has yet found the magic formula. No valuation methology is able to predict the value of a company in any specific date.Having said that, there are valuation methologies that can be considered more academics than others. In the case of PEG, I would consider it as a good rule of thumb for a quick and dirty valuation. I think DCF is a much better methology although as I said before, not the perfect one.

        1. Dave Pinsen

          “Prediction is very hard, especially about the future” – Yogi BerraPEG and DCF share that same weakness: both require as inputs predictions about the future. The danger I’ve seen with DCF is that some users of it seem to get false sense of precision from it.

          1. Guillermo Ramos

            not only PEG and DCF require predictions but all methodologies do. Adding up uncertainty to weak methodolgies is an explosive mix. The danger I have seen is some users get too simplistic. In any case, my point is that is better to use more academic technics. I do personally always use a main valuation methodology (which is different depending on a case by case basis) and then use several others to contrast.

  25. Donna Brewington White

    You are on quite the roll with over-the-top great posts since your return from the Middle East!Stop it! I’m having enough trouble getting my work done as it is.

  26. Guillermo Ramos

    Just a little story to illustrate how multiples are not a valid valuation method in growing network businesses.In Feb 1999, the 3rd national mobile network operator was launched in Spain. In July 2005 it was sold to France Telecom for $ 10,000 million. In 2001 the EBITDA was $ 275 million (x36 on 2005 value). It is not very smart to value a company based on multiples when it is still rolling up its network/ starting to monetize it. DCF/ comparables are probably better approaches.I know you can say is not very smart to compare a network operator with 10,000 BTSs with a Web 2.0 network business. May be you are right but there are some similarities when looking to both (Facebook-Amena) businesses:1) You need tons of Capex to build your network2) There is a stiff J curve effect3) There is a solid incumbent in the market to beatOn the long run, all 3rd mobile players in Europe gained 20-30% market share on average.The main difference is that in Amena we were selling the same product as the incumbent. In this case, Facebook has a huge&solid network, but the product/s to be sold is/are mostly still to be defined and we have seen huge 2.0 networks fall very quickly before being able to monetize its users.Under uncertainty circumstances, valuation of companies in the web world is by far much more volatile than in the offline world, even for consolidated companies (compare last 3 years stock evolution between Google/Wallmart under uncertainty).Facebook uncertainties are huge, as well as web rapid evolution is. The only certainty we have is its current price (50 b), but remember that only nerds confuse price and value.

    1. Dave Pinsen

      The approach Peter Lynch made famous was to divide a company’s earnings multiple by its estimated growth rate (PEG ratio). So a company with a Price/Earnings ratio of 10 expected to grow earnings at 10% per year would have the same PEG ratio as a company with a P/E of 30 expected to grow earnings at 30% per year (PEG ratio = 1, in both cases).For companies that don’t have positive earnings yet, you could use a similar approach using different multiples, e.g., instead of using Price/Earnings divided by earnings growth rate, you could use Enterprise Value/EBITDA divided by expected EBITDA growth rate.The salient point is that you are adjusting your valuation for growth expectations. The danger, of course, is that the company doesn’t grow as fast as the estimates.

      1. Guillermo Ramos

        There are a lot of valuation techniques and nobody has yet found the magic formula. No valuation methology is able to predict the value of a company in any specific date.Having said that, there are valuation methologies that can be considered more academics than others. In the case of PEG, I would consider it as a good rule of thumb for a quick and dirty valuation. I think DCF is a much better methology although as I said before, not the perfect one.

  27. JLM

    I hit the post icon a bit too early.The other thing I observe about FB which to me is quite consequential is the wave of businesses which are using FB as a proxy for their own websites.This is a very, very, very important dynamic as these are “suits” rather than individuals.This is the mainstreaming of FB.

  28. markslater

    well i am most certainly smarter today having read all the wonderful and insightful opinions on this thread.thanks fredland!

  29. celestus

    I’ve put a little thought into this topic, and while I agree with you on the point that Facebook could be worth more than $50 billion eventually (right now on SharesPost, a Second Market-eqsue message board/trading platform, people are buying it at close to a $150 billion implied valuation assuming their estimate of the # of outstanding shares is right), I’m surprised we then begin to disagree.Say that Facebook IPOs and by the end of 2012, 2 years from now, it’s at a $60 billion market cap. Great, that’s a 20% return (before the fees that Goldman is charging the investors in their vehicle, but whatever). That’s under a 10% annual return for a fairly risky and illiquid investment in a private company. If I had the chance, I’d pass.I would tell these guys (and/or girls) (a) to let me find opportunities with better than a 10% annual return on average or (b) that they should take a look at Second Market, SharesPost et al themselves for better bargains.

  30. HowieG

    Fred I have crunched the Facebook data. Network usage per user per day is down 22% since April. Possibly even more since that was based on 540mil accounts. They engagement numbers for the network (people doing stuff beyond logging in) is very low for a network that size. Number of photos each user uploads per month down to 5.5 from 7.5 each per month. US unique visitors flat since July. Aside from Facebook Ads which work, the rest really has been a yawner. So would I buy into Facebook with casino cash I can lose. Yes why not.But I see a pump and dump. Not sure how this would affect the IPO market for other internet start ups.Wouldn’t they go IPO at $50b right now if they could? That in itself has me very curious at what is up.

  31. Leonid S. Knyshov

    Facebook advertising is only beginning to scratch the surface.Did you notice that you only see ads when you click on things?… – this is me wishing Happy Birthday to a friend. Notice the completely irrelevant ads.There are no ads on my newsfeed page.…Since Facebook is making a ton of money with this anemic system, I would be very bullish on what they will accomplish once they stop playing and really nail the advertising platform. That is why the current ratio is immaterial to me.Facebook seems to have two initiatives.1. Own the social graph of every living person and every business worldwide.This is basically a solved problem.2. Figure out how to show ads that will result in extremely high engagement.I am puzzled why they are not offering retargeting, for example.Once Facebook figures out what is relevant to me, the floodgates will open.

  32. Donna Brewington White

    Great title…

  33. Donata Cappelli

    Good morning Fred, as to FB, I point out the article about it from The Economist (this week p.57). I was amazed about the multiples..because they speak about 2 billion $ of FB revenues and later on they clearly said that the figure refers to sales (not to the margin).. if they are right, the EBITDA will be much lower and so the multiple much higher! It is really surprising “even by the giddy standards of start-up world”.. Is there any misunderstanding? my compliments for your interesting blogs, best rgs from Florence, Italy

  34. Alexander Ainslie (@AAinslie)

    “Stocks are meant to be sold, not bought” or put another way, “Be the one issuing the paper, not buying it” 🙂

  35. AlanP

    When you said “Will Facebook shares be offered to the public at $75bn, $100bn, even higher? We just don’t know.” you hit the nub of the (share) issue. An unjustifiable valuation at $50bn is irrelevant if A Bigger Fool exists in the market.

  36. Uno

    Yes, I do hope that I can a second change to SHORT many of these firms if there is another IPO boom. I believe it is much easier to pick the overvaled losers after an IPO boom, once thier books are public and IPO mania has overpriced many of them.I’m looking at FaceBook as a potential short opportunity after it’s IPO and I can see what their actually business really looks like.