I don't disagree with PG when he says that Facebook's IPO performance (or lack thereof) has the potential to impact valuations in startup land. I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening.
But let's put Facebook's current valuation in perspective. At the closing price of $26.90, Facebook commands a valuation of $57.5bn (according to Google Finance). Facebook had around $4bn of cash prior to going public and raised about $10bn so let's assume they have $14bn in cash on the books. That means Facebook has an enterprise value of roughly $43bn.
In its last quarter Facebook had $1bn of revenue and 40% pre-tax operating margins. If we annualize those numbers, that would be $4bn of annual revenue and $1.6bn of annual pre-tax operating margins. Let's use pre-tax operating margins as a proxy for EBITDA, because this whole post is back of envelope quality analysis and please take it for what it is.
That means that Facebook's enterprise value is greater than 10x current revenue run rate and greater than 25x EBITDA. These are big multiples folks. I am happy to take those numbers for any company out there.
Clearly Facebook is a premium company and commands a premium valuation and entrepreneurs should not expect to get 10x revenues and 25x EBITDA for their companies in a sale or an IPO. But even at half those numbers there are fantastic returns for investors and entreprenuers to be had.
If speculators are disappointed with the performance of the Facebook IPO it is because they had ridiculous expectations of what rational investors would pay. The market has put a premium valuation on a great company and we should be happy about all of that. I certainly am.
Building great companies takes time; seeing great investment returns takes time.There are no shortcuts.People who buy to flip would get similar odds and have a lot more fun in Vegas.As always, caveat emptor.
The stock market can definitely be gambling.
No, that’s the point Mathew.Long-term investors aren’t gambling, they’re investing.Buying shares to hold them for a few minutes, hours or days is gambling.
Right, so they believe they understand the odds.I wonder how long and how many of them have been studying internet technology and behaviour of people, and understand the leading edge so they can best predict where their investment money will lead….
I’m afraid that’s simply not true any longer. The market has basically been stuck in a broad trading range over the last 12 years. There are very few companies that have shown growth and kept it over this period of time. If you’re looking to invest 20+ years, that’s great, but the signs for future prosperity are also poor with there being plenty of significant economic risks (Euro, US, etc..).If you’ve done well the last 12 years holding the same stocks, you’re very fortunate. Most haven’t.
I don’t disagree = I agree? Why not say I agree? If you mean you don’t entirely agree why not say it?
WrongI don’t disagree != I agree !If you don’t understand why , then why not say ” I don’t understand” ? Try this, there are four cards showing 1, 2, A, B- you can only see one side of each – You are asked ” Is it true that cards with vowels on one side have even numbers on the other. ? “How many cards do you need to turn over to answer with certainty from the evidence available.For a very good answer readhttp://en.wikipedia.org/wik…
I dont disagree with your comment
Ok Fred – That was much more classy than my response
Speculators and Wall Street can destroy great companies and national economies. So now after this debacle, that should be no reflection on Facebook but rather an indictment of Wall Street we have an IPO market that is frozen….Somehow we have to find a way to reform Wall Street from a speculative point of view and return it to an investment point of view.
Uh, Wall Street has never been anything more than what it is today, unless it was worse in terms of pre-computer chicanery.-XC
Sorry, totally disagree with this one and I bought my first stock in 1975….
You disagree that it was less transparent in the past or disagree with my premise that the players have always sought to maximize utility or that it’s always been the province of speculators?Historically my first and last statements are pretty obviously solid. I suppose one could argue that the relationship between the investor community and the financial framework has fundamentally changed in the era of ‘retail’ investing.-XC
“Maximize utility” is a term that means what?If you look at the length of time that stocks were held, lets say 40 years ago vs. today, you notice that stocks are traded much more frequently today than they were 30 years ago. One could then argue that a longer term perspective was “investment” while the shorter term perspective is “speculative.”40 years ago you did not have “program trading” as you do today nor did you have all the creative speculative investment vehicles and all the fancy accounting tricks that you have today.Were there speculators 40 years ago? Sure, but they were not the norm now they are.You could argue something about “maximize utility” or talk about the “relationship” between something you want to call “investor community” and something you want to label “financial framework” but that’s just a fancy way to cover up the stink that passes for standard operating procedure on Wall Street….
This is sad it is at the bottom of the comment thread. There is no doubt in my mind the worst aspect of the FB IPO it shows what a screw job Wall Street is for the average consumer investor.I think FB did the best they could getting maximum dollars for their shares and not letting Wall Street extract a “pop” and give it to their cronies. But who took it in the shorts? The average consumer investor, who didn’t get the revised numbers.
I think its sad from a variety of perspectives and not just for the average consumer investor. Already some decent companies have pulled their IPO’s and of course more will soon to follow. I think FB is a good company run by smart people and they will be “tainted” by this for years to come. I think we are creating some great new companies in tech but I think that the IPO muck will limit that in the future….oh, and I forgot to add to my original post that Wall Street never had the potential in the past to leverage our nation’s GDP to the levels they have now….
Wall Street is less transparent today because of all the shenanigans that are played-and codified by poor regulation. Dark pools, payment for order flow, internalization of order flow, front running are all a part of the system.
Less transparent today compared to what time frame? Not meant as a rhetorical question – I’m interested in the answer.No question that technology enables new bad behavior, but it also prevents previous ones._XC
The stakes are bigger. The computers and algorithms are better. The rule makers have fallen farther behind. For heaven’s sakes, we are debating the morality vs legality of cutting revenue projections during the roadshow????? Oh right, it was legal, maybe not moral. Ponzi is alive and well. In a perfect world WS is supposed to be facilitating liquidity and reducing risk. We know its not a perfect world, but this has seriously set the IPO market back and VCs as a whole should understand how this ultimately hurts them and therefore capital formation for startups.
100bn is ridiculous50bn is high25bn is good for the insiders.10bn is about right for everyone :-).
FB stock is worth ~$7 per share.
I think it’s a problem when your company starts to look a lot more like Groupon than Google.Especially since “premium” is as much a perspective as anything else. The things that make your company unique for the good can also be viewed as binders.-XC
I do not pretend to be a finance guru – but 25x EBITDA seems highIf this is were a 4% return on gilts it would be exciting – but it isn’t risk free.If it included depreciation / amortization it would assume a living client base rather than an immortal one.The only possible argument for this kind of valuation is either that a) even my mum bought some or b) That I genuinely believe a meaningful revenue model will replace the mediocre one that exists. That is to say that FB will get some lifetime value out of its “typical” subscriber or more out of some particular subset.If the argument is that FB has the power to control the whims of the global public then by the same argument the Roman empire would be here today.But if Networked revenue is heading mobile and mobile is heading to voice, then facebook has as about much future as a radio station, albeit with targeted ads. Once radio was a huge influencer, but after radio, in the time it will take FB investors to earn their money back, TV, the internet, texting and now voice texts were invented.Caveat Emptor
yup. a premium valuation.
the market is far from a rational pricing mechanism — largely because of inflationary monetary policy that generates bubbles and SEC-sanctioned corruption that tolerates quote stuffing and naked shorting — and as such i think an analysis of speculation is needed. goldman and other fb insiders have already sold after parabolic price appreciation in the secondary markets. goldman is a trading company (actually a white collar crime operation, but we can call it trading for now) and they are moving on to the next opportunity. if you look at price action on friday, and if you look at what sectors within the market did well and what didn’t, you see there were particularly sharp divergences. sector rotation is occurring and money is flowing out of technology.to put it simply: goldman took bailout money and ran a pump and dump in the social media sector. if you followed goldman on the way in, don’t forget to follow on the way out.personally i dont see how fb, a company clearly struggling with mobile that has grew up on banner ad monetization, has decelerating revenue and user activity, and has slower display ad growth than google can be justified in having such high multiples. if you use the multiples google is getting and apply them to fb, you get a share price for fb under $10. if you factor in that we live in more speculative and volatile markets, and that fb will overshoot to the downside……well you get the idea. a potentially very low price. fb is the mothership of bubble 2.0, so you can expect its peers, the majority of which are even worse fundamentally, to perform even worse.in sum, the bubble 2.0 party is over. now we can finally get on with the serious work at hand.
I don’t have time to comment long, but I disagree. The market is very rational and all public information is incorporated into prices.
Agree with the last bit, but not the first. The market is driven by sentiment, and sentiment is irrational (although it occasionally offers the illusion of reason, usually retrospectively).
Read M&M or Brealy Myers Principles of Corporate Finance. A classic but still valuable.As soon as you realize that any recognized trend must be immediately discounted in a rational market, you will realize that all technical rather than fundamental trading is predicated on the existence of an imperfect and irrational market.Since most trades are technical (and any process involving arbitrage) the market must be an illusion of information abstracted from an imperfection of information.By contrast fundamental analysis is the mechanism by which the market pays for new information. If the market were perfect it would have no function ! It is not – it does, and the fastest machinest can still make the most money (until fundamentals intervene). Since we cannot all have the fastest machine – we are all behind the curve unless we have untraded information. If we do not then playing at all is irrational and should be conducted efficiently using indexes or similar. Anything else is a tax on the stupid.
Over the long term maybe but not over 24 hours which is how IPO success is measured these days.
Is that you Makiel? 🙂 Sorry, couldn’t help myself.
As usual KM, a lot to chew on there.First, compared with the AOL/TW merger cnnmon.ie/L5laot FB’s valuation doesn’t look like a big bubble; more like a small one. Bubblicious nonetheless, even if many on this board are somehow dependent on FB’s piggy-bank and don’t like to hear it.Second, what is surprising is that questions of mobile’s impact came so late in the process. If you look at recent AVC posts it’s clear that most of us still don’t fully know the impact of mobile; except that we expect it to be big. But one thing I do know is that mobile broadband, while “pervasive” is 20-150x more expensive than it should be. Thankfully, Steve Jobs left us with the 2nd coming of equal access (802.11 backdoor in smartphone) and that’s why I am cautiously bullish; reason for caution is that the market may not have fully priced in growth hiccups resulting from bandwidth bottlenecks. Previous bottlenecks were analog POTS 1990, analog cellular 1994-1995, and broadband wireline circa 2000. Those all resulted in crashes in various sectors.Third, Mary Meeker recently outlined a lot of that potential mobile growth in the form of disruption to the bricks n mortar world. Interestingly her list didn’t go into what I believe to be the big commercialization opportunity of mobile, namely CRM. The smartphone is an unbelievable connection and feedback loop with the consumer. Maybe that’s an area that FB can harness, if it is not communications, transactions or marketing.Fourth and last, Wall Street has once again successfully demonstrated how to kill the golden goose and why they need some serious disruption!
I don’t see how Wall street has killed the proverbial “golden goose” here. The equity capital markets teams of investment banks with their shady pitches and disinformation (sub-judis currently), maybe.But the secondary trading desks, if anything, have brought sanity to FB’s stratospheric valuation via exposing them to the big, bad market where your valuation is exposed to the worldwide vagaries of recession and all discounting takes into account not just the factors intrinsic to the performance of a company but also the ability of investors to find capital in a volatile market.Welcome to the major league, FB!
Only replying on the last part here, but I think Instagram is too tied to Apple to be a large scale mobile network (or Facebook 2.0 skunk works project to disrupt from within). I’m not sure how Facebook re-conquers mobile or keeps the key competitor from gaining a foothold (they can’t acquire every potential competitior). Maybe the good news is no one does at least for now.
so then i’m curious if you think FB has much upside anymore?
i don’t know about that. i don’t buy public stocks other than when there is blood in streets and everyone hates stocks. that’s just a contrarian play on markets. as for what the future holds for facebook, i have no idea.
Fred – Please can you clarify.>>The market has put a premium valuation on a great company and we should be happy about all of that. I certainly am.Do you mean – It is good to see the market take money from ignorant speculators, that will fund the investors who deal in fundamentals ? – A hard but a fair and reasoned argument. It at least acknowledges moral hazard.Or do you mean – FB is a great company and the market still has a premium value on it so there is still room for profitable derivative trades ! – In this case it remains to be seen, but who would be buying futures ?By implication – the investors who have not yet dumped “this pig in a poke ” are “buying the future”. They are like the last subscribers to a chain letter or Ponzi scheme. They have been suckered by crooks (again) and I cannot be happy about that .I really rather hope you were implying the former and not the latter.
i didn’t mean either of those things. i just meant that the market is finding the right price for facebook, not the bankers or the company. and at this point in time, that is ~$27/share. and in addition, that feels to me like a premium valuation on a great company. that’s all.
Agree. Facebook, their banker, and the NASDAQ made some gigantic mistakes that lead to the IPO failure. They also went public in a market that had a lot of bearish sentiment. One thing people fail to say is that while the buyers of the IPO got burned, the employees and investors that took the risk to build the company were given max value on their shares if they elected to sell them in the IPO. That rarely happens. Most of the time, the IPO is run by the banker and artificially designed to “pop”.If the public learns anything it should be that they shouldn’t pick individual stocks because they can’t beat the market. They should just invest in index funds, work at a job and save their money and never look at the market until they retire.Let the computers trade (and mess up) the individual stocks in the market.
I don’t see how you can describe the ipo as a failure. The company rasied the most money it possibly could. Mission accomplished.
Cutting revenues during roadshow. We now know that to be immoral, but not illegal. Learn something new every day!
There’s nothing immoral about revising forecasts pre ipo, as long as you let all classes of investors know of the change.
Wasn’t it an analyst, not company forecast?
The underwriting analysts receive ongoing “guidance” from the company.
I think what I was referring to was the failure of NASDAQ to execute it correctly, the failure on Facebook’s part to correctly transmit information prior to the IPO (who raises the float a few days before the event) and the failure of their banker.The fact that $FB started out in 2004 and went public in 2012 creating tons of wealth for employees and investors is a success story we should celebrate.
@hymanroth:disqus You really have a number of issues. You have brokers who tried to place blame for buy/notbuy doing so with the old, “they were sharing the revised data with big players” routine. Keeping simple, most should have known with all of the noise happening going in, so it would be best to sit back and look for where the price would end up after turmoil.
That is the company’s and managements responsibility. This one should have been delayed due to market conditions though.
I’ve noticed an “Internet/tech school of thought” and a “Wall St school of thought” on this. Tech folks think FB is valued a lot more than $50BN: the data they are sitting on is priceless, they can built out a lot of amazing things in the near future, etc.Maybe tech folks are not rational investors for tech companies! Sounds like an oxymoron
The data is priceless, but only if you can crack a way to extract the value. If FB got Jeff Bezos on the board, I’d throw half of my 401k to FB stock. He knows how to extract value from data, I’m not sure Zuckerberg has gotten it yet.
Other than creating content, there are 4 basic ways to extract value by facilitating: 1) communication (twitter), 2) transactions (ebay and amazon), 3) marketing (google), or 4) CRM. People don’t see the path to monetization clearly in the first 3. However, #4 is very very interesting as the corporate world needs better understanding of and direct relationships with customers and useful feedback loops to improve products and services and their margins. That’s clearly one of the promises of big data. Does a social media engine with lots of users and expressions (mostly of likes) accomplish that?
Likes are funny beast. danah boyd offers an interesting anecdote:Nobody loves Big Data better than marketers. And nobody misinterprets Big Data better than marketers. They do so because they think that What answers questions of Why. My favorite moment came when I was on a panel where a brand marketer from Coca-Cola proudly announced that they had lots of followers on MySpace. I couldn’t help but burst out laughing. Coincidentally, I had noticed that Coca-Cola was quite popular as a “Friend” and so I had started poking around to figure out why. After interviewing a few people, I found the answer: Those who were linking to coke were making an identity statement, but it wasn’t the fizzy beverage that they were referring to.
Funny. Just so happens Coke was used in this article highlighting hockey stick ramp for QR codes; whose use is up 157% Y/Y. bit.ly/LlhTlP Maybe that has to do with the market just beginning to figure out what to do with smartphones. Maybe FB should be thinking engagement apps that include QR codes (CRM) across its userbase and less about pictures (Instagram). With QR code it’s easy to differentiate interest in a bottle of coke on the store shelf from coke bought on the street.
Yeah but give me something for scanning it, not just some freakin’ marketing webpage BS like 90% of them.
“Monster of the double entandreCoke is still my sponsor, the cola, yeahHOVA still getting it in with soda” – Jay-ZI can never resist a chance to quote Jay-Z.
that sounds like bad research to me…
she’s a social scientist.
I’ve read her stuff, and she is a great social scientist, the people she is talking about sound like that they can’t do research though
ah… got it this time 😉
#4 comes down to how much privacy data is FB willing to sell? Are they selling my friends list only, or my ignore list as well? Are they selling those that I list as acquaintances and those who I list as best friends? Are they exposing which walls and which friends’ posts I comment on the most? If so, they might be able to crack CRM, but then they’d lose half of their users for over-sharing their data, me included.
I’m thinking more overt inbound connections and feedback apps such that the customer is aware that their opinion counts based on their circle/gravitas. Not insidious or covert profiling. Why can’t a negative opinion result in positive change? How that is elicited in a “like” world is the challenge/opportunity.
Oh you don’t need Jeff Bezos to extract value! That data is valuable in so many different ways to so many different people ranging from marketing folks to computer scientists to social scientists.Imagine the recent paper that used the graph of 721 million FB users to conclude that the “6 degrees of separation” between people (a result from 1960s) is more like ~4.7. There is no other dataset in the world right now that can let you do that. The kind of information you can extract from FB data and the level of detail is mind blowing
True but how much did they get paid for that access? All I’m saying is to look at where Amazon started, where it is now and where it’s going. The foundation to that value was created by data. FB knows who and what you LIKE, Amazon knows what you BUY. This is a good read on it. http://www.alternet.org/med…
always gotta support pro-amazon comments…..they’re just getting started. eventually the feds will step in and call it a monopoly once it becomes apparent to all that bezos has taken over the world. i wish i had bought the stock after the 2008 collapse, still kicking myself over that…..if there is another collapse i’ll def get me some amzn.
@mlloyd:disqus @muneeb:disqus You guys put interesting number/perspective. I think it is best to define Valuation per it being a future based on current perspective. So I ask, “Why do so many have to speak of FB being the one who controls everything?” FB has been a boon for those just getting started with computer, increasing the potential marketshare for the coming battle on who has first hand on whatever bit of data per user.And it wouldn’t really take that much to put FB in a lurch.
FB’s valuation is based on them controlling the user’s social circle in the future as they do now, and hopefully monetizing that in some way that doesn’t creep out or turn off the users. The problem is, relative to Amazon anyway, FB users aren’t looking to be sold to or packaged and sold where Amazon users are specifically looking to buy, be sold to, and even shared around like a Colombian call girl at a Secret Service convention.
Very well put. 😉
Well said and is the Achilles Heel.
Agreed, they are very under-valued. Especially with their anticipated takeover of media, a very high margin business. You also can’t knock the very sneaky, gentle way that they’ve done it (from a consumer point of view). How can you not love a company that made shopping online with its inherit need to ship a product and wait for its arrival MORE convenient than going out to the store?
You have had some really good comments on this thread. Makes me think about my consuming content versus consumer buyer in another light.
It’s valuable, but I’m not convinced it’s priceless because it’s largely devoid of intent.
People also completely ignore that the market of how you can or will make money in the future is shifting.
Yes. As someone said in the thread on HN, if there was a revenue firehouse they’d already have turned it on.I think they still have significant untapped potential to make boatloads of money, but I don’t think the means is entirely obvious just yet — it’s all a bit hand wavy for my taste.
I don’t think they’re capable of guiding the company to where the value actually is, as that would require them to let go of control.
There are plenty of other sources of advertising/outreach online now – as simple facilitating as word of mouth and having a good product.Before in advertising, 100,000,000 eyeballs, if you had it in front of you, it would hold a very high value – because you would have been paying to tap into that or own one of those very limited resources. Nowadays there are plenty of locations, an excess, of inventory to be able place your ads on if that’s the method you choose (with similar levels of effectiveness across all sites).Creating a revenue business through an AdWords-like program? Facebook’s ads will fail. They won’t be as successful as Google’s program. Why? You know those images they put along with them? They’re meant to catch your attention, eg: be invasive – and people turn off quickly to that or are annoyed by it. Text-only ads as Google have aren’t invasive in comparison.
I’ve never seen a FB ad because I’ve never had an FB account, so your take on them is very interesting to me.
They’ve introduced so much noise in the targeting system that buying at scale and then recalibrating to a place other than facebook is extremely difficult.Part of the reason is data privacy, but frankly speaking, I am of the opinion that people get more pissed/confused when the noise is in the system when it comes to targeting.
Most other comments I hear about it is that people don’t see them either, who do use Facebook, because they use AdBlock because the ads are so intrusive.
I think the value is that when you are looking at Amazon you are in the “consumer buyer” mode. When you are in Facebook you are in the “consuming content” mode.You used to be forced to get pushed between the two but if you look at newspapers you understand that people refuse to do that anymore and the revenues follow. Same for yellow pages….worth billions but Google has done to them what Microsoft, and then Wikipedia did to Britannica.Google was able to do both because if you search for some obscure fact they only give you the consuming content mode but if you are in the consumer buyer mode they monetize right where you have to, at the transaction.
Exactly.I also have observed a surprisingly large amount of friends just click the 1st link result in searches, which is usually an ad. It’s relevant too of course.
Intent matters for advertising, not for building cool products using that data. You can build better search engines using that data. The entire Google vs. FB war is based on the fact that Google doesn’t have access to that data and is scared of it. G+ is getting shoved in our face to generate similar data. In the Google vs FB war the markets are undervaluing FB right now, in my view 🙂
Building a search (read: intent capture) engine kinda proves my point.I do agree that there is plenty of value in the data, just not that it’s priceless.
Yes, but I really don’t want a search engine curated by MY friends. I’d love a search engine or let’s call it a Discovery Engine curated by people I find interesting. But I think that exists already with Twitter – and they know it.
Oh no it’s not that kind of search: curation has nothing to do with it. Google’s PageRank looks at how webpages “vote up” other pages by linking to it, but Google can’t index FB data when people “vote up” webpages. Who you follow or who your friends are doesn’t matter. This is just data that feeds to algorithms and gives better ranking for search. Google doesn’t have that data and wants it. Badly
Gotcha, so it’s not what my friends find interesting, it’s what PEOPLE find interesting. That’s actually worse for me, it’s a retreat to the days of Yahoo search back in the 90s. Google won because algorithms were better for the task, curating those results by people you know or find interesting though would be adding value IMHO. As long as I can define those people or a demographic of those people.
Yes, what humans as a whole find interesting. Yahoo search was different technically, so in no way it is going back to those days. Google came and said that here is some data (link-structure of web pages in their case) and this is how we can use it. Now there is additional data (link-structure of social graphs) that can make search better. It’s best just to think of it simply as an additional data and nothing more. It’s still algorithms, only that algorithms get smarter when they have access to better/more data.Webpages of the late 90s were made by people as well, but the links they were posting on webpages were publicly available. Now a lot of valuable data is behind the walled garden of FB. That is the single most important thing to understand in the FB valuation debate or FB vs. Google debate, in my view.
I’m just not sure how much I value that data behind FB’s wall for shaping search. But maybe I’m thinking too narrow with ‘likes’ and should be considering what’s being shared via Status messages as well. In that light, I can see it as a trending engine similar to Twitter and I do think that Google is late to that game and could use some bolstering there.
google’s data collection suite is rivalled only by amzn. google has chrome, gmail, google reader, google analytics (wow!), even google+ if anyone decides to use that. so much more too. the challenge is actually integrating all that stuff in a meaningful, easy to use fashion. also, as marketers get on facebook more and more, the signal/noise ratio of likes will drop.
You could over time figure out correlations to intent and use the data as a proxy.
That would be an interesting model in the absence of intent e.g. a predictor for intent correlated against a predictor for intent.
Not an oxymoron – An interesting angle.There is danger in “drinking your own kool aid”.Subjectivity especially based on short samples of data (e.g. the entire tech industry) will tell you that a FB share is more valuable than enough to eat. But much of the world (including many FB users) can live on the value of one share for a week.This is why the valuations are ludicrous – they are judged by the marginal user (the one that actually clicks on the ads – not on the millions that never will).Some of the biggest farms are mono-culture – therefore mono-culture is a good way to farm ??? Mono-culture crops are also good at creating dust-bowls. There is a dry wind blowing.
Tech companies tend to drink their own coolaid.One of the reasons I think this happens is because tech companies tend to me much much more forward looking. They are never about the now, they are bout the what could be, and how to get there.It is a good quality for building a company, but perhaps not for valuing it.
i feel like i live in both worlds with one foot in each of them
No one was forced to buy that first IPO day or anytime after.If institutions and other investors were/are pissed because they couldn’t flip their shares that first day I am not exactly upset for them.That final S-1 was delivered to all parties and was not hidden.Was this IPO botched technically, yes by NASDAQ and the size of the offering. But these are all big boys and can take care of themselves.No one has to sell their shares and should sit tight as things calm down.
Huh? Cutting revenue projections during the road show? Oh right, immoral, but not illegal. Mind the road show began many many months before the S-1 was circulated to “all”.
They have to make public relevant info such income slow down. If they hadn’t they would be in serious trouble.
This misses the point of the article. The point isn’t that investors were made to buy stock or not, the point is that the trust has been significantly hurt in the IPO market where it’s already been hampered by other IPOs.When a price is set by the financial institute for day 1, the investment community benefits when that price is the correct price. When this much uncertainty is created, the true speculative nature of the IPO market becomes all the more apparent.FB was the IPO darling. I’m not sympathizing for people that lost money. I do think, however, this means a lot of long-term pain in the IPO market. Does it matter that much? I guess that depends where you’re looking to grow your investment portfolio.
If the IPO had been done in a rally none of this would have occurred.Market conditions were already deteriorating prior to the IPO and that was warning enough for an investor. If you would not start any other trade during that time why would FB be any different.Many companies get off to rough starts but that does dampen their future,Look at AMZN’s start.
I wasn’t that close to the Google IPO back in 2004, I recall the way Google ran the IPO pricing was in the form of a Dutch auction.Google just seemed to be a better company w/their approach to going public.
Facebook’s style of IPO mimics its past carelessness and abuse of its users.. Not sure why anyone would expect them to change.Google likes to go with what naturally occurs – to not go against the grain. Facebook likes to try to control, to set what the grain will be.
Notwithstanding Zuck’s noble letter and appeal to the good of all????? Cynicism? No!
One-off’s and the like are more just signal that there’s a problem and it was used to do damage control / sway public opinion, versus being company culture that exudes and overflows with the majesty of hoping for the good of all; I’m sure you know this though. 🙂
Yup – what you describe appears to be their Company Personalities as well
Fortunately, I was well versed with Bernard Baruch’s famous comment :”Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish.”When the “shoeshine boys” are talking stocks, it’s time to get out! The day before the facebook ipo, i literally heard everyone around me discuss the ipo. I was on the subway and 2 random guys (didnt look like brokers) were predicting movements of the stock. I went to the gym and the trainers there were arguing on whether facebook will pop in it’s first day of trading. Everyone in my office was talking about it..i mean everyone!That’s when Bernards Baruch quote hit me. When everyone is discussing a stock’s performance (like shoe-shiners) it is smart to leave the investment alone. Thanks Bernard and thanks for Fred for this fantastic community
Lovely post. Thanks.IMHO, the real winners are the stock owners prior to the IPO. They were smart about it, though I don’t like that it feels like the market / people that don’t know any better (or were lied to) were, in a sense, abused by it.Sure, $14 billion can buy a lot of something and potentially increase profits and therefore stock value – though that doesn’t eliminate competition that exists and is honing themselves quickly. In fact it can still also sprawl more competition through seeing how much money the market sees is available.
“IMHO, the real winners are the stock owners prior to the IPO.”Of course, that’s what an IPO is for.
I personally disagree. If I IPO as a company it’s because I know I can genuinely increase the value of the company higher than what it’s being sold as.Perhaps my understanding of where things are going, merely by being different than perhaps where Facebook genuinely sees things going shows a contrast to me that makes me feel their efforts are disingenuous
Both GOOG & FB went public due to regulatory issues, it seems.
it’s just show business, on the same page as the celebrity news ..
That’s a great use of the famous comment but keep in mind that it’s a little different.One of the reasons everyone was talking about FB is that everybody knows about facebook.So it was recognizable and something people could relate to. This is not the IPO of Archer Daniels Midland. There is also the equivalent amount of hype around anything the media decides to go ape on where people talk about it ad nauseum.[In some cases it works, an example (non stock) was the apple iphone. People thought that was over hyped as well. I went on a cruise the day after release with an iphone and every single waiter (of poor foreign birth) wanted to ask me questions and touch it. ]”When everyone is discussing a stock’s performance (like shoe-shiners) it is smart to leave the investment alone.”Of course if that could be reliably true you could probably make money hedging or with options.
The key here is the last statement. A ton of people were talking about LinkedIn going public. I feel a lot of people are leaving out that the Facebook IPO was hyped and covered unlike any IPO we have seen. All of the comparisons are TOUGH. While they are fair to be made, some can be a stretch.Me saying that does not discredit anything @domainregistry:disqus is saying, I just feel perspective in this scenario is difficult. You are spot-on in that people wanted Facebook because they use it, though. I had friends who have never even seen a ticker symbol ask if they should buy. I ignored their questions.
you’d be surprised what brokers look like these days, especially those that deal with small retail investors
I don’t think this applies. Noone I know has talked to me about ‘getting in on FB’.Its localized to Wall St.
Not the case for me. Most of my friends and coworkers were talking about it and many of them bought shares.
You are very intelligent and you can see the simplicity in the world. Keep it up!
If I remember the math correctly, FB was valued at roughly $100B on the IPO at $38 so $26.90 is about 70% of that – $70B. Not all the proceeds were in the form of primary stock sales (the cash that comes back to the company) and FB had debt on the books as well – as the underwriting banks had put up large lines of credit against the IPO proceeds – my guess as to the Enterprise Value is closer to $60BThe company is expected to show $3B in EBITDA this year (or there abouts) and most of that will be plowed back into CAPEX to keep the machine rolling so essentially very little free cash.So 20X EBITDA for a company that is struggling to find its way in mobile (as is everyone – don’t get me wring it is very very difficult) is a pretty large number compared with Google at under 8X EBITDA.The implied growth rate of Facebook therefore has to be far far higher than any expectation for Google or Apple (under 8X EBITDA) or any of the other large mega tech companies.Buffet said it best: in the short term the market is a voting machine, and in the long term it is a weighing machine.On the IPO, the votes were in, and everyone thought that no matter what the price – the stock would just shoot up. when it became apparent that this was not going to happen, then the votes went severely the other way – and you are starting to see the first glimpses of Facebook being weighed as opposed to voted upon.What people, I believe, failed to grasp, is that when looking at tech IPO’s – if you severely restrict the supply of a company stock (say FB was a $100M IPO not a $10B IPO) and you have tight allocations to professional money managers like Fidelity and Putnam and Capital Research etc… – then what you might have is $40M of float – which can be hyper inflated by public buying pressure.Once Facebook decided to sell $10B of stock – there was essentially no way to get this sort of “Pop” out of the IPO absent the first few minutes of chaotic order imbalances and that’s exactly what we saw.Facebook is an unreal and awesome company – and its valuation should be the envy of any company you could ever hope to invest in.But just because that is true, doesn’t make the stock a great buy at any price: a lesson the market participants seem to have learned on this IPO.
I agree, the huge release of stock is a big part of demand being low. People forget that companies during the Internet boom released millions of stocks, not hundred of millions or billions.FB’s volumes are dropping. The cautious investor will wait a few quarters to see what the numbers are, but I do think FB IPOed at the time to maximize their return.The reason I’m not investing in FB…. no one likes using it. It’s like Windows in the early 2000s of the social networking world. Everyone is using it, but people are complaining. This is a very isolated observation of my direct and extended social circle, but it is reinforced by a general sense from the “internet.” That’s not to say the stock won’t go up from here on end, but I find it a vulnerable long-term play.
oooh. windows of social networking!what i want to know is what is the mac of social networking.
There has to be one. One of the most interesting things I watched recently was an interview of high schoolers on CNN. The core take away from was something like “well, we’re all on Facebook now, we’ll probably use something like it in college, but not Facebook.” The irony, of course, is Facebook started with college students. It hit my school in 2007. The other part is while it has a world wide market (dcurtis had a great breakdown through one of the S-1’s) it also has a demographic that is skewing older. I don’t imagine it will be displaced for the same reason as Myspace and will be central to identity on the internet for years to come, but it may not command the same audience attention it does now.
interesting.i think the linux of social networking is more valuable — it won’t sexy, but it will be the platform that runs just about *everything*.although continuing the analogy, it’s plausible the apple of social networking will hoover up all the profit.
That’s easy! Twitter. They’re smaller, probably not the same revenue potential, they’re disliked by people that don’t use it, loved by people that do, and while they make changes that anger their user-base overall they’ve done a good job at keeping a loyal following. Plus, Twitter tends to get far more media attention (mostly via celebrities that say things they shouldn’t).Granted, Twitter is actually successful and has far more market share than Mac even does today, but if we were to make comparisons this works in my mind.
I have long held (and likely over repeated) that MS, GOOG & FB are all started by the same personality type……and in their 20’s, those types of people are disdainful (bordering on cynical) of others.Oh, Bill Gates is in his 50’s now and despite a decade of little to no growth, MS CF & cash holdings are anything but ‘vulnerable’……
great points harry and thank you for correcting my back of the envelope math. fortunately the exact numbers don’t matter a ton. it’s the perspective i was trying to provide.
Market price is not only determined by no-arbitrage (which is, in essence, your valuation argument) but also by supply and demand (which depends on relative-value strategies)What you’re talking about here is the “fair” price of FB – which has got nothing to do with the market price. Fundamentally, as you say, FB looks like a premium stock. However, investors in the public market look at marginal returns among a peer-group of companies as a key metric to look at which company to invest in.Now, due to the crisis in Europe/bad US payroll numbers etc., the stock market has taken a dive generally and all tech companies have suffered erosion in their market value as a result of that. So, let’s not look at absolutes here.Relatively speaking, let’s look at Apple (whose revenue source is not the same as that of FB) and Google (whose revenue source is primarily the same as that of FB). Apple has lost $72B in market-cap from its April peak (with peak-market cap being around $610B). Google has lost $24B (from a peak of $210B). FB, on the other hand, has lost way more on a relative basis. So, which stock do you think would be more in demand, as investors try to shield their assets from the downturn? Certainly, not FB.
This is all psychologically well, interesting? But, there has been a ton of talk about the VC boom in the valley going on a few years. I think this market reaction is a good response to it.Who really stands to lose here? VCs? Zuckerberg? I think everyone *except* the retail investor is in ok shape in this case…But the retail investor is a sorry sap, and well so it goes.Given the mayhem that accompanied the dot com bust including retail and institutional investors, a glitch here or there is probably not a bad thing to keep everyone in check.The commoner has come to know the state of the investment class, and its not a pretty picture.As for Facebook, well, show me a website with 900 million sticky users in a few years, and then show me the next one. It will happen, but what will we have learned? Nothing. (see Yahoo)
Fred I agree 100% that this has little to do with low-end valuations. This wasn’t an IPO, it was a secondary.Zuckerberg did it exactly right. Extract as much cash as possible to fund his mission, which he has been VERY CLEAR in stating has very little to do with making money.Just goes to show that the old saying is true: Never buy stock from a guy in a hoodie.
The PG comment (and Fred’s implied agreement) hits me like a red alert, because whether true or not can be self-fulfilling. We all remember the “RIP Good Times” letter.Fred blogged about “Storm Clouds” not too long ago.Andy- you made an interesting comment saying that the FB IPO would be a key inflection point http://www.avc.com/a_vc/201…
Sometimes I surprise even myself with my prescience!
I think this will affect early valuations, because people will start focusing on multiples. If you focus on multiples a ton of the early deals I see getting done go away. Just like the housing crisis you have the innovators, imitators, and idiots. Once the idiots see you can’t just make money by blindly investing in startups with no due diligence things go back to rational.To the people that have been doing this for 20 years the Facebook IPO is a who cares, and frankly the fact that Facebook kept all the money from the IPO versus giving it to the inside institutions and high net worth investors because of the “pop” is great.To the idiots it is front page news.
Yes. It’s hard to see how “thumbkissing” raises $4MM in an era of multiples and real businesses.
Exactly right. As you well know, I thought the hype was going to carry this stock way up ala Netscape. My comment after the closing bell was “Zuck stuck the landing.”I think we need an e-book that can start with “Never buy stock from a guy in a hoodie” and of course would end with “Never bet against a guy in a golf tournament named Bubba.”
If Facebook continues to succeed and grow, that’s a good thing for everybody.That “guy in a hoodie” is smart despite his age and the hoodie. He’s surrounded by very smart people and they are executing well. The world is their oyster, and they know it.
$43b / 900m users = ~$5 per userAt a “normal” EBITDA X of 10 (?), that means they have to make $0.5 per year per userThe current advertising revenue model does not do that,so it requires a step change, a revenue model innovation.Payments, media sales?The $100bn question 🙂
Their revenue model doesn’t follow traditional advertising metrics. They are already breaking the mold on it.
OK, didn’t know that
what about the possibility of them not being a $100bn company?
If the revenue model innovation doesn’t happen, that is the outome
I’m with you for sure, especially on the point that it should only affect late stage scenarios vs. earlier ones. Valuation multiples have always been primed by a company’s growth rates, and for Facebook, growth like the sky is the limit. No one knows how big their revenues can get, but the bet is they will be a lot bigger than they are now. To put things in perspective, Facebook is monetizing at only 4$ per user ($4 billion on 1 billion users). What if they monetize at $100 per user? That’s not far fetched and that’s $100 billion in revenue, slightly under HP, IBM or Apple’s revenues. That’s doable & is 25x what it’s doing today. I don’t believe Zuckerberg is doing what he’s doing to be a $ 4-10 billion company. I wouldn’t if I was in shoes. He wants a $100 billion company, and investors will get $100 per share.
The problem is, the dollars per user is declining and so is growth. There’s absolutely nothing whatsoever suggesting FB will earn even more revenue per user than what it does today.
That would be a disaster if that’s true.
There is a lot they can do to address revenue per user. Growth i am less sure about
This is complete speculation on my part, but from my understanding, social networking is growing at a slower pace in North America, but that there’s still plenty of growth in other parts of the world.Just from a pure disposable income point of view, your US FB users are likely bringing in the most per-user dollar revenue. China, for example, spends a third of what the US does on advertising so even though they have the massive user base, they’re not going to bring in a lot of revenue.I agree, that in the US, FaceBook will find tons of creative ways to make additional money and those ideas will translate well into some other markets. I’m not convinced that their per-user revenue will go up because of growth in markets that spend significantly less on advertising as compared to the US.I’m making a lot of assumptions here, so I’m not by any means married to this line of thinking, but that’s why I think overall the per-user revenue will continue to decrease.
stuff like this has a lot of potential http://newsroom.fb.com/News…
Didn’t see that coming. The stats on how often FB is used to launch apps (new installs and current installs) are impressive.On the bright side, looks like FB has bottomed out. I can’t see it going much lower then it is now without either bad news, or bad earnings. Not sure when we’ll see $40 again, but it’s a better buy at $26.
$26 vs $40 is irrelevant to methat was the whole point of my post
this is agnostic in cross-platform posting: If This Then That http://ifttt.com
Everyone’s focused on Facebook when in reality, people should focus on LinkedIn.When LinkedIn went public, it P/E ratio was 1100x (not %, it was 1100 times earnings).It’s since dropped but is still roughly 550x. That’s just sick.Essentially, it’s a company with only $15M in annual earnings but worth $3B+.
how about the ones that aren’t even profitable….i.e. yelp…..lol
Like you, I don’t understand the attitude towards FB’s IPO somehow being a failure. Over the weekend I had an interesting conversation with one of the founders of Ask Jeeves (now part of IAC as Ask.com). Their IPO was notorious for opening under 20 and ending the first trading day above, I think, 70; Morgan Stanley was lead underwriter. That set off a whole frenzy, of course, but thinking as the founder of a business, of course it’s horribly frustrating to see that value (whether it was ultimately right or wrong) captured by others in the market, not by the people who had created the enterprise.It seems to me like the underwriting process for FB got the price approximately right — the Goldilocks price (not too hot, not too cold…) I base this precisely on the post-IPO trading range. Of course it’s still highly speculative! but at least the speculation seems to have occurred pre-IPO, and not in post-IPO silliness.
But they dropped more than 10% in the first week – the price seems to have been pushed up, not in the Goldilocks zone (it would have just stayed at the IPO price otherwise)
Others might disagree but I see volatility of 10% or so in a week — especially in a market as generally wacky as today’s — as being in line with the highly speculative nature of Facebook as a business.All I’m saying is that I don’t see FB’s post-IPO price performance as lending support to the argument that the public flotation process is broken; that conclusion seems overwrought to me. Actually (thinking about this some more) we may be over-weighting the dot-com era as being representative of the process of going public. Public markets are, and maybe appropriately, pretty conservative in what they will accept as a publicly traded company; and this behavior goes back to the founding of the modern exchanges (LSE, NYSE). The idea behind having listing requirements, corporate governance standards, and the other apparatus of listing, is to protect the investing public from shysters, hucksters and outright morons. (Look a little further back and I think you’ll see the shadow of the South Sea Bubble over a lot of this — it’s the Original Sin of shareholder capitalism.)It may be that we’ve returned to the norm, and the dot-com era was the outlier. To me, 10% (up or down) in a week — not so dramatic given the nature of the business. As I write this, Akamai, just to take an example, is down more than 6% though the market is up, and they’ve been public more than a decade.
I am completely with you and I have been the recipient of getting share allocations just for the “pop” as a favor for doing business. Dirty ugly secret, but now they don’t allow individuals just funds. No different than congress being immune from insider trading laws.
So in summary, Morgan Stanley guessed a good number people would be willing to buy the stock on during day #1 trading, and everything else be damned?Had the price been correct, we would have seen that +/-10% adjustment. Reality is, the stock has lost significantly more than that in value since the first day of trading.Since no single investor owing pre-IPO stock sold all of their gains, this logic is also short-sighted. FB the company probably got the most value from the sale of the stock, but the company lost 30%+ of its value since.
that was my whole point right there. thanks for making it more succinctly.
Dual-class shares… public, but not. Personally not my cup of tea. Sure is a lot of noise though these last few months.
there are accountability problems in running a business, especially when more and more businesses seem to be run via quarterlies rather than say 5 years.
I thought we could finally stop saying that Instagram was purchased for $1B but the media doesn’t seem to know how math works.
Who is PG? And why be so clubby?
Communities do that to put a barrier to entry for any newbies. The ticket of admission is knowing how to click on a link.
that gave me a laugh Larry
I find it interesting that Paul Graham used a late-stage IPO pricing “mistake” (it’s still an incredible valuation) as the reason to warn his early-stage investments to lower their expectations.I think you’ve mentioned before on this blog that valuations in early-stage were getting frothy (or was it someone else?). Perhaps Paul is simply using FB as a framing event, to address that single issue?
Where is the perspective on Facebook not publicly disclosing lowering earnings guidance during the IPO roadshow? All of the VC’s, hedgefunds and other insiders seemed to know about it, The public investor sitting on an immediate 30% loss with poor disclosure reeks of pump and dump.
yup. that was not good.
If you invest for long gains, the current speculation matters less than the companies actual performance. Is Facebook going to pay dividends? Or is that something that comes much after IPO?
Dividends don’t come until much later in the cycle. MSFT, INTC
When a company no longer needs cash to scale, an IPO typically means that they estimate the public’s valuation to be higher than their internal valuation.Furthermore, when the public equity value appears to be lower than their internal valuation, they will likely purchase equity back from the public at that discounted level, especially if they have the cash to do it.
I know it’s back of the envelope but the multiples Facebook’s market cap is actually $75 billion, not $57 billion.Fully diluted shares outstanding are 2.8 billion, not the 2.1 billion Google finance is using. Google is either ignoring the convertible debt or the employee options/RSUs.
thanks for clarifying that. it makes my point even stronger. a premium company carrying a premium valuation at this point in time.
I had to go to a meeting where the main question was to me regarding FIRST Robotics/TechEducation in Southeast Missouri. In describing how fast everything is moving, I gave the following observation:Isn’t it amazing how in one week we have a computer shut down the launch of a rocket (SpaceX) within a nanosecond (the human counting down said zero) and in the financial sector we have all the experts (Nasdaq) who botched an IPO over a complete trading day?Do not feel sorry for the flipper/floppers. If you are looking longer term, do your homework using money you can lose.
Anybody have any historical comps? It’d be interesting to look at past IPO’s with similar performance and how those companies fared over the long haul. How much does an IPO like this correlate to eventual success or failure (or just mediocrity)?
The only thing I can think of is google. Facebook also has a unique ad format on going public. Google at the time had fleshed out their ad formats more so than Facebook has currently.
Facebook IPO was the top of the market.
I don’t get why Facebook isn’t charging for their API. That’s where the value is. period.
Nooooo. Pls nooooo. That would kill a lot of startups that are trying to figure out what to do with it. If they have to pay before they can make the money themselves, that’s not a good thing. Plus, I’m not sure if the apetite will diminish if it’s not free. Their attitude has been “Take my API, please!”.
.The job of the investment bankers is to sell stock at the best price for the selling entity. IBs are not altruistic entities charged with providing orderly markets or “fair” prices. They are hired guns. Hired by FB to do FB’s bidding.They did a pretty good job.They got a price for the stock which clearly upon reflection way more than folks wanted to pay in the retrospect. The selling price — driven by demand and artificial scarcity — was more than the auction price after things had settled down a bit.Selling stock to hordes of investors with wildly different motivations is way different than assessing a “fair” valuation. Maybe it should not be but it is and the FB deal proves it pointedly.Fred’s assessment of EV is as good a consistent yardstick to apply to COMPARATIVE valuations but it is a single valuation technique.No quibble with the way it was applied though it has to be clear that FB is assumed to have no debt and no preferred stock in his analysis.As to multiples and current valuations, it would not be unreasonable to opine that they are a bit rich particularly given comps such as Groupon and Google and even the price of FB itself.That is what makes an auction such a fair pricing mechanism.For a great number of reasons, I think that FB is a $13 stock when the dust settles.Even at that price, it is still a rich price..
Still higher then RIM. think they were just over $9.00 last i looked
12.5x ebitda isn’t rich among FB’s comparables. but it is rich among all public companies.
So then you’re liking my ~$7 price.
If you want a reason why some of the ‘great’ private companies have been reticent to go public, look no further than FB.We are sitting here hemming and hawing about how FB is worth 30-40% less. And there is so much more fuel to criticize – did they do the IPO right, who are they screwing over, how will they monetize, etc.It’s almost endless noise…and very distracting. Wonder if Zuck & Co. can keep the crew focused and figure out how to best use the $14B in fresh capital to continue to grow the business.Regardless, this is a marathon people and we’re all sitting here talking about it like it’s the 100m dash.
Understand your opinion, but remember this is the big boys/girls club. They got their money and have no business sitting around like victims. If they are as great as suggested, then keeping the crew on task is part of the game. And if you pay someone hordes of money to be ‘creative’, then tell he/she in simple English how you want that ‘creative’ to produce revenue (real valuation material) or show the door.This is not written as someone bitching about FB, because I really don’t care.Looking long, it is better for more realistic numbers to come into play.
who at FB is sitting around acting like a victim?
I meant that per your stating Zuck & Co. keeping the crew focused… I know what you mean and my response was not meant to be too negative in nature.
I agree with both of you. Even if you could get half of Facebook’s multiples today, that makes starting and growing a business like theirs very, very attractive.However, from what I see (and I see much less than you do) there is a ton of early stage financing going on at ridiculous valuations “funding the dream” hoping that somebody buys you out before you have to apply multiples.Eventually you have to apply multiples and that is where revenue hurts you as you say. That is where the dream got popped because people realize you have to start applying rational metrics to valuations.I’m calling the top, here. I think Chris Dixon had it right on his Saturday post.
i wouldn’t mind a bit if that turns out to be the case. but i am not sure of it.
I still look at this IPO as uncertainty of what the markets would do with it. I would be foolish to argue anything in Fred’s post, because it is spot-on.The public was not sure how Wall Street would value the Facebook community. In tech, large amounts of users are everything. Pinterest will still probably stick a higher and higher valuation on themselves, regardless of FB’s performance, and a lot of the industry will bicker but allow it. There is something magical about millions upon millions of people using something together. For Wall Street, there is nothing magical about it, for now, it seems.And while we need to see some quarters of sustained growth, and the monumental announcement of monetizing mobile, they need to make a quality mobile app. Adding more crap on top of an app that is already unstable and sluggish would be a disaster.
Call it a correction. Facebook’s performance is likely to bring valuations back to reality. Perhaps people will start thinking in terms of revenue instead of users, but that’s probably just wishful thinking at this point.We need to find a happy place in the middle. One wherein both investors and entrepreneurs are successful (and active).
From Graham’s letter:”If you’ve raised a lot, don’t spend it; not merely for the obvious reason that you’ll run out faster, but because it will turn you into the wrong sort of company to thrive in bad times.”When people or companies spend money it’s not just because they are drunken sailors.Sometimes they spend money because they decide that they are taking a risk which will pay off in the future.Simply saying “don’t spend it” is like telling companies to always be lean and think carefully. Duh. Of course. But the devil’s in the details. No risk (with money or strategy) no reward. It’s simply positively not that easy. Business is about risk taking. Built in is that you always have to evaluate the pros and cons of spending a dollar. Of course you will always tend to be more vigilant when things are bad and more loose with cash when things are good. My feeling is that even though Fred is set financially if he was looking at a vacation property today vs. at a different point in the bubble he would be more cautious in terms of what he was willing to pay.This is all about psychology and how people think. People spend and invest when they feel positive and hold back when they feel insecure. Beyond rationality of course.All those corporate executives that are called in to restructure that cut-cut-cut expenses and people? What do you think? That the person before just decided to add machinery and people without regard for adding operating costs and is a fool? Wow how stupid were they, right? No they took a chance and bet wrong on the ability of the business to continue to support that overhead.As anyone who has bet right or bet wrong can tell you it’s not that easy. What is easy is monday morning quarterbacking.
The best time to sell anything is when buyers have no experience.FB was able to convince investment banks that they fell into the ‘special situations’ file.The IPO valuation is preposterous.
Maybe the expectations were so high because everyone knows the company but very few know the financials? You said it very well, “I am happy to take those numbers for any company out there”, this means that you know it is a premium, and premiums tend to mean someone on the other side of the coin did not get such a great deal.
Ironically I think Facebook’s popularity is what is hurting the stock. My question is why go public KNOWING that things are in such disarray. Most companies will hold back their IPO knowing the market is turbulent.Fortunate or unfortunately, FACEBOOK is the gauge of the market today. The entire market has lost almost 7% of their value but the media centers on FACEBOOK.
The emphasis here should be the stories behind the numbers.- There is obvious a large disconnect between the professional investors, from whom underwriters gather most of their market intelligence, and the broader pool of investors, in their understanding of FB and social media. The former control more money but their opinions are founded in part on their forecast of retail opinion. All the pros seem to have misread the larger market. First guess: they’ve overestimated the “greater fool” demand for the stock. Second: the offering exceeded the appetite of the tech-investor base, and revealed that those investors are substantially more bullish on tech than the larger market.- Skepticism about the internet ad model, and a leading player’s ability to build a mobile ad model, is very real.- There is a substantial disconnect among the tech and financial communities, with the former not particularly interested in the values and concerns of the latter. Everyone has a right to an opinion but giving these their head, when extending one’s partner base, can cause miscommunication (e.g. the analyst forecast cuts pre-IPO).The communities are feeling their way to a general understanding of the social media business and its prospects. It’s a bumpy process and and some conventional wisdoms have just been tested to destruction. Next step is formation of new CW, and it seems very likely these will be less favorable to social media financings than the old.Hard to say how this ripples down the food chain, or how quickly. But if investors’ portfolio models were predicated on a couple of home runs, and the odds of home runs are perceived as substantially reduced, the ripples could be larger than we might think.
Agreed. Posted my thoughts about here and how VC competition and fund dynamics also play into things: http://bernardi.me/2012/06/…
fwiw, I’m pretty sure Google & Yahoo finance have the wrong market cap (due to wrong share count). The actual market cap is considerably higher http://www.marketwatch.com/…
that’s what Harry said as well in a comment above. i am glad i wrote “based on google finance” in my post. in any case, it only makes my point more strongly. this is a premium valuation Facebook is carrying.
Any regular investor who gets caught up in IPO hype like it’s a Big Movie premiere or new iPhone release, deserves to lose money. As for me, I just invest in solid but boring stuff where the numbers make sense. But what do I know? I’m just a Joe Six Pack.
Do the numbers behind the massive growth of iPhone sales not make sense? Are you suggesting they’re fake?
I was commenting on the hype of a IPO. I was just using lines outside the Apple Store as a example of how that sort of thing is good for widget sales and fun for some consumers, but buying into hype is not wise investment strategy.
I went to bed last night pondering Josh Hannah’s tweet: “Early stage tech investment made sense with FB at $38. But if you can only make a $57B company in 8 yrs, our checkbook goes in the drawer.”He may not have meant it the way I took it, but it just struck me as ridiculous. If you can’t make more than $57 billion off a single company in eight years, you’ll just take your marbles and go home?So I appreciate your take today, Fred. We can disagree with their philosophy or approach, but Facebook is a great company. Zuck did his job and secured the resources he needs to build a much stronger company.And the only folks complaining are people who completely misunderstand the purpose of the stock market. It’s purpose is for long term investors to capitalize companies and share in the rewards. (By the way, our philosophy on this is why Riskalyze won’t allocate IPO stocks for three months after their debut. We serve investors, not gamblers.)If you can make a quick buck buying and flipping stock, or trading in the options on stock, it’s a free country and good for you. Heaven knows I’ve done it before myself.But quick flip profits are not a God-given right. And for those IPO buyers who put in limit orders at $52, it is beyond immature and stupid to throw a tantrum because your short-term speculation in a long-term investment didn’t work out.
i did not see that tweet. but it makes no sense to me. and i’ve been doing VC for over 25 years now.
I was wondering if he meant “if this is the top of what is possible” but I still didn’t get why that equaled checkbook in the drawer.http://twitter.com/jdh/stat…
Aaron – I read that as sarcastic. If I can only create $56.995 B of shareholder value in the next 8 years (as opposed to the $99.995 B the IPO intended), I am keeping my $500K in the mattress.Pretty funny, IMO.
I hope you’re right and that would make a lot of sense. Needed a tad bit more hyperbole to ring my sarcasm bell.
” It’s purpose is for long term investors…”I don’t know. It appears the markets are providing opportunity for people to gamble and to invest longer term.
Companies don’t list themselves on NASDAQ or NYSE to give people the opportunity to gamble.
You, Paul, and most of the comments are missing the big reason why we are entering into a super bad time for startups: the world is about to get shredded by a global macroeconomic crisis. Compared to the macroeconomic problems, the FB IPO fiasco is a pimple on an elephant.To wit:- Europe is bust: There are only two possible outcomes – massive default (bank and sovereign) or massive money printing. This is already baked in and there is no way out. US banks will lose a trillion or so. US GDP will get smashed.- Bush tax cuts are ending. At minimum this will lead to a massive political fight which will cause uncertainty in the financial markets. At worst, the tax cuts will expire and investors will see capital gains rise sharply.- Presidential elections. More uncertainty. An insane debate over the debt ceiling is almost guaranteed. The government might shut down.- DoD budget cuts. Due to the Budget Control Act, DoD spending is scheduled to be cut sharply. This will cause massive political chaos.All of this is happening by the end of this year and these are the real reasons why startups are in for a bad spell. The FB problem has simply brought this coming disaster to the attention of Silicon Valley.
yes. the macro disaster is the only story. people don’t want to talk about it because tehy feel there is nothing they can do about it, but acting like it doesn’t exist only ensures the problem will grow and will be felt. nothing has changed since 2008, if anything the problem has grown.
i don’t disagree with you either!
Exactly. Had they priced the IPO right and there had been a bump we would not be talking like this right now. In silicon valley companies earn ridiculously high valuations by VCs and investors all the time because they see the growth potential. Had the public markets had a say Instagram would not be worth 1 billion dollars . . . but it is in Silicon Valley. I view the dip more as a reminder that the real world still calculates the value of a company based on profitability, not number of unique users etc., and while SV investors are often willing to accept hand-wavy explanations of future profitability, the public markets are harsher. In my opinion it really shouldn’t affect the fundraising climate much at all.
Great comment. You nailed it.
…but profitability is a function, in part, of unique users in today’s monetization mechanism. It is very much a player as you calculate Value.
Lots of downside left on those multiples….
Can’t agree more!
That is nonsense. 25x EBITDA! Just saying a company is a premium company does warrant a number out of no where. Why 25x? why not 50x? How do quantify this premium you speak of? A premium over what? Based on what? You have to go further. Simple thinking about complex valuation problems will not suffice.
i don’t like to make things complex. it makes my head hurt and it doesn’t make me a better investor either.
I’ve been worried about the acquisitions market as well as the venture market for a while and this FB IPO is going to be the tipping point I think. I was sad to see PC agree with me.However it doesn’t effect general business which continues to grow slowly.Just like 2001, keep the down and focus on making money.
However PC needs to be more careful. Hes like Greenspan. His words move markets.He should have called his portfolio companies and warned them privately.Unless this was part of his plan.
Sorry guys to create a mess here at AVC … I just did some extrapolation to what Fred said about the valuation of FB.I express myself and I feel comfortable in this community about that.Market expected it to be 110+ and turned out to be 57 almost half of it…. fred said he would be happy as an investor half of that would be fantastic … i thought logically dividing by another 2 would be right [email protected]:disqus I am no troll… I am here with this community for almost 4-years now……… so ignore any comment if you don’t like it.After making those comments I went home and slept and came back today morning to see all the mess that has created….Sorry again guys….that was not my intention.
No worries. New day. New post. New convo. You are a regular and we like that.
No problem. I think it would be a good gesture on your part to send us each $1000 cash USD. lol
I read this Op-ed piece in NY times last week titled “Facebook’s Brilliant disaster” (link: http://www.nytimes.com/2012… and it made a lot of sense to a non-financing person such as myself. The point of the article was that the facebook IPO was a disaster for the hedge fund managers, wall street insiders and anyone who was looking to make a quick profit in 1 day!! The fact that there was little room for Facebook IPO to go up meant that Facebook maximized their uptake. For those who are truly bullish on Facebook – then time will tell whether their investment will reap a good return over the next few years.
I think this post hits the nail on the head. This is exactly how I feel about it. I bet against the IPO, but only because the ratio was irrational and I thought 1/2 of what the market maker picked was about right. It’s just over that now, and I think it has room to grow. However, I still think Facebook is valued too much on future performance, and they have a number of significant challenges to their business that are going to be a great challenge to balance over the long-term. They’ve proven themselves brave and assertive, but they also have to battle with Metcalfe’s law, and Watts and Strogatz’s small world properties by staying relevant to users while pushing increasing commercial interests — that’s a hard balance in the best of circumstances. I hypothesize that many do not ponder that Facebook greatest risk is becoming “uncool” to active users, or have a newer cooler way of connecting come down the pipe with rapid uptake and fail to respond in time. So value yes? Risk of failure? Definitely. Nothing is too big to fail. I think that many institutional investors recognize these and other risks, and the market priced them appropriately despite the hububub. Just a thought.The impact in startup land is that valuations are hopefully going to head towards being somewhat realistic again. Awesome. Let’s build companies instead of valuations, and worry about creating value instead of just exits. The exits will always come.
And a damned good one!
Thanks for the post Fred. I still feel that the stock was overpriced. With all the money Facebook have in hand, if they are able to sustain the growth rate and increase the revenue, then the price will shoot up automatically. But offering was really really overpriced. Speculation because facebook is a special company.
Good perspective on FB value. I agree with Graham that valuations could go down, but I don’t think there is any need to panic. Here are my thoughts: http://wp.me/p1GQ3i-9E
I too see Facebook’s valuation as standalone, not holding any marker for any other entity. Using Fred’s numbers – $4bn annual revenue / 1.5bn+ pre-tax operating margin – these are *tremendous* numbers, to begin. Consider for a moment, How Facebook Monetizes and at What Rate. – this is no where near where they can be. The true Value can be estimated by a look at two numbers: unique visitors, & time per visit – time on site. The optimal monetization will be north of the numbers above, and will tweak FB’s valuation accordingly – but should not have much effect on other valuations.
The mkt cap should be $27* 2.816B (not 2.138B)=76Bshould include opitions
Fred your math is wrong. If the company was valued at 104B at $38 per share, the valuation is close to $74B market cap at the above price; meaning EV of $60B which is more like 15x revenues.
Thanks. That’s even more of a,premium valuation!
i appreciate the diss but if you apply google’s multiples to fb you’ll get a valuation around 10 bn if not lower. if you factor in that google’s display ad revenue is actually growing faster than fb you have a case for an even lower multiple than google for fb.
6.25 X 1.6bn … I hope you know how multiplication works or should i explain?
Paul – uncalled for. Back of the envelope post allows for this type of characterization. On top of which, Kasi ‘smileyed’ it.And he came to about the right number too.
I’d down vote you if I could bring myself to click the stupid button. Your comment was not helpful, and it’s you that ultimately denigrated the discussion.
@kagilandam:disqus , @proales:disqus . Life advice: Limit the troll namecalling to actual trolls. One of the reasons this place works is because we allow people to say what they think.Paul, I value your opinions here. I also value Kasi’s, And If I didn’t have both I probably wouldn’t be able to think as clearly as I do about many issues.
which of course, adds nothing in itself.
Actually it does; instead of aimlessly clicking the button anonymously, I made my feelings clear. Thanks for your feedback – pity about your throw-away account.
PROTIP: Every stock market transaction is based on the greed of both parties.There is literally nothing new here, other than the fact that a much higher percentage of the “greedy” parties in this scenario were ignorant amateurs.
“nothing about the sustainability or long-term value of the company”Stock investing in general is only about what somebody else will pay for the stock. The money that a public company makes doesn’t flow to the investors and if it does only trivially (dividends). People buy stocks because they hope to sell the stocks to someone else in the future. @kidmercury:disqus why do you buy (or not buy) gold? Planning to sell it to Dentists or jewelers at any point?People invest in other things because not only can they sell the investment if appreciated to someone in the future but also because it earns them income currently in a degree much greater and more secure than with any stock purchase. Why more secure? Because they can know more about it and control things that they can’t control and don’t know about when buying a stock. And one of the primary reasons a person will buy that investment from them is to earn income as well. @kidmercury – your cousin and gas stations?I sold my first business many years ago for a multiple of (I believe 5 or 6x earnings). And to this day it is still making money for the person who bought it. In the early days he did well enough to pay off the note several years early. He had contacts to get accounts at places that I couldn’t.To make money you have to transform something preferably something that is difficult for others to do. As an example if you want to buy investment real estate you don’t buy a condo in a building, that’s to easy. You should buy something rundown that scares everyone else off and transform that. (Of course if you find a condo in a nice building on a high floor in crappy condition and the widow who owns it needs to sell asap you can make money as well).
I have to disagree Charlie. I think Facebook stuck it to the investment banks and who better to stick. It always amazes me when people think a big “pop” is good. Frankly you’re just giving money to rich people. When I used to have an account with Alex Brown, I would justify the ridiculous fees compared to a Vanguard account because they would give me some of those IPO shares and I’d just flip them for a quick profit.
Correct….based on supply and demand….and it was still over-subscribed with retail/fund orders to buy at $42 morning of open.
They did their job, price to optimize the value of the sale to Facebook.
Yes, thier job is to take something that was bought for X dollars and sell it for X+1 dollars. They did their job very well, kudos to the pros!
IPO price set by supply and demand. Everyone puts in their max bid. No one forced to buy.
siding with charlie in this beef. how good does the company look when the IPO tanks AND insiders unloaded big time on the IPO? what’s that look like? something trustworthy?i don’t blame fb too much. they’re a software company, not a financial organization, so i’m a bit more tolerant of this mistake. still though, a mistake is a mistake.
Will be interesting to measure public perception when they inevitably announce a buyback.
12 months from now, noone will remember.I agree with the view that FB stuck it to the iBank folks.
Post-IPO is not the job of the IPO people. They are not going to work *at* FB. Their job is done.
“”greedy” parties in this scenario were ignorant amateurs.”Hey – I want a chance to throw some stones here (like the character in wall street Lynch (James Karen) who claimed that he knew Bud Fox (Sheen) would go bust)Mark’s handlers failed to reign him in. He obviously had a big say in the pricing (and his choice of clothing when courting investors).The minute I saw him show up in a hoodie I knew they were in trouble. (Seriously what a tip of the iceberg I mean I’m all for casual dress and always wondered why Bill Gates wore a suit and why sports coaches wear suits so much but a hoodie? Zuck’s not an entertainer. He’s supposed to be a business man. Even Mason wears a suit when courting investors, right? Why not a bathing suit? Why not fart and burp? )I mean I can’t say that I’ve always listened to what my parents have told me to do. But every now and they they draw a line in the sand and will tell me I have to call my Aunt and do the respectful thing. Or to attend some function. Once, say, every three years they say “can you just do it because I want you to do it?”.
“AND insiders unloaded big time on the IPO? what’s that look like? something trustworthy?”Grinning ear to ear possibly. In order to make money in business it is often necessary to do unpopular things and people end up not liking you. The only question really is what will the net effect be going forward on them as a result of their actions.
“what’s that look like?”It looks like a job well done! The job of an IPO is to sell stock at the highest price possible.Now, FB has money to do something with. We’ll just have to wait and see what that something turns out to be.
It still appears that Facebook deserves higher multiples than google – 2011 saw roughly 55% EBITDA margins. Google had about 37%. Although fb’s Q1 only generated a 40% EBITDA margin – ad businesses tend to ramp up meaningfully in the 4th quarter. Facebook has growing pains for sure, but the leverage in its model is very well demonstrated.
sure it’s a good short-term strategy. there’s a reason why amazon has a p/e ratio of around 200 though. it’s because top employees dont get paid huge salaries, rather they are paid primarily in stock, and insiders don’t unload like that. when you behave in a trustworthy fashion you earn long-term trust of big institutional money. you then have shares worth a lot you can use for acquisitions. fb can try to do some stuff with a buyback, but let’s see how that goes. if management unloads and breaks the alignment with shareholders, it’s going to be tough attracting strong hands that buy and hold for the duration. rather it will become a haven for speculators.
who knows, people still feel there is a lot of business opportunity to be unlocked.
In stock market they are one and the same 🙂
If you take all the science projects out of GOOG’s cost base, it likely puts their margins on par. The structure of the companies are nearly identical.
i buy gold because rich people buy it, and because i believe demand for it will only grow as the people realize there is no safe place to put your money. i generally try to buy what rich people buy because that drives price. rich people have a different approach, whereas the masses worry about not having enough moeny and getting more the rich are like “damn life’s tough i got so much money now i gotta figure out where to put it all.” many stocks are simply substitutes for cash, or attempts at hedging against currency devaluation.not all dividends are trivial. there are stocks out there with yields greater than 10%. even stocks with a trivial yield, like apple, are trivial by today’s standards. if you bought apple at $12 a share a dividend of $2.65/share is quite meaningful. dividends are a major force and i believe as we run out of bubbles and the economy remains weak this will only get proven more so…..in fact one of my candidates for where the next bubble will be will be in high dividend stocks, and if this does manifest, i think we may see a move towards greater dividend issuance…..
“The minute I saw him show up in a hoodie I knew they were in trouble.”Who was the target market? Was it sophisticated business people? Or was it techies in hoodies?
Wait don’t go. Help me to understand what you’re saying. A difference of opinion is always good in a discussion.
Not saying you don’t know this but for anyone not aware for some reason Zuckerberg was wearing a hoodie when he met with investors, I’m not talking about prior use of hoodie:http://www.pcmag.com/articl…Best quote of Dvorak in this article by the way:Zuckerberg isn’t begging these investors for their money. It’s just the opposite. They all want a piece of what is perceived as the hottest ticket out there. The investors are the ones who should be dressing up for Zuckerberg, not the other way around.
so then why the hugeness of facebook. It should be big, but not that big.
“there are stocks out there with yields greater than 10%.”The problem is that those stocks come with the chance of the stock value dropping and if you need to sell you could easily loose much more than the yield.Otherwise everyone would buy ypf and the price would reflect that:http://finance.yahoo.com/q/…Look at that juicy 26.5% return.
I like the way you think @kidmercury:disqus
well any stock can drop, cash can drop, anything can drop…..there is no escaping risk. dividend yielding stocks are tougher to short because shorts to pay the dividend too. there are some dividend stocks that i think are high yield and reasonably secure. i’m about done with satisfying my appetite for gold and uranium, dividends are my next frontier (although there is a bit of an overlap between gold and dividends and i think that will become more apparent in time)……still need to do more research but i think the best opportunities are in canada.
Not sure I get your point. Cool he walked in wearing a hoodie. But, that doesn’t matter.All that matters is if you sign to do an IPO its your responsiblity as CEO, banker, whoever to do all required to help sell the IPO to the public at the highest price possible!
no but I don’t see them either. I don’t see anything that I posted via email. I’m typing this on computer now, but I also replied “Huh? no” via email. let’s see if that one shows up too.
I just made two comments that disappeared. I feel so unworthy.
Totally, they’d even ask me if I wanted to sell them immediately on the pop or hold them. I didn’t even have to put in an order, it was just like depositing money in my account. You didn’t think some poor schmoe got the offering price do you?
What makes you think inevitable?
Charming. Because companies with a boatload of cash that believe their share price doesn’t reflect the true value of the company tend to run an equity buyback program.
welcome to the club donna — i’ve had it happen to me on numerous occasions. they weren’t even conspiratorial comments — regular normal stuff! i’m assuming there are some issues going on with disqus as it only started happening to me once the transition was made to the new disqus.
Did they eventually show up?
The saying that applies is “when in Rome…”.Showing up in a hoodie when your audience potentially will have a problem with that dress, does not insure you will get “the highest price possible!” Common sense dictates that you take the safe route.When in doubt, do what the government does and float the idea first and judge the reaction (to me of course it’s a non-starter).When people have sex it’s their responsibility is to satisfy each other. Along those lines it’s normally a good idea to be showered and clean if at all possible before commencing. It makes for a better experience in most cases and generally insures a better outcome.
“Showing up in a hoodie when your audience potentially will have a problem with that dress”Your point holds true. I’m just saying that I think the intended audience was techies not sophisticated investors. So, I guess I’ve assumed that sophisticated investors wear suits and techies wear hoodies.I don’t know who invested in FB. I like the site, but I don’t want to be involved in the market right now.
Disdain for Wall St. GOOG made Wall St do things it normally would not do. Power surge, basically.
“cash can drop”Cash doesn’t drop like stocks can drop. This isn’t a third world country where purchasing power will be 50% of what it is next year.Stock fluctuations can be easily way more than the effect of any inflation or currency devaluations.The 52 week range of the DJI is 10,362 to 13,359 and today it’s at 12,130.
My father, in his late 80’s and a facebook user got FB ipo shares allocated.I was almost certain he would buy at $38. He didn’t. When I asked him why (I actually thought he did, lost money, and was embarrassed to tell me) he said something like “they were all saying it wasn’t good”. By “they” I think he means he had read some things pundits had said and concluded not to take the chance.
the real cash drop hasn’t happened yet, though the decline that has been going on for 40 years and has accelerated noticeably in the past 11 years provides a taste of what is coming. you’re right this is not a third world country — yet. we’re on the way there and that will be understood sooner than most think.
Charlie,Are you a Peter Drucker fan?
nicely said shana. it doesn’t happen often here and when it does, it stands out like a sore thumb
THERE A NON-ZERO CHANCE OF MASSIVE INFLATION IN NEXT 5 YEARS, WHEN THINGS DONE TO MARKET OVER LAST 40 COME HOME TO ROOST AND GOVERNMENT TRY TO STOP IT.THAT ONE ME, GRIMLOCK, AND KID AGREE ON.
guys, shoot me an email when this happens, I’m not attached to the hip with disqus…
I think maybe you and Kid need to rethink “inflation” considering that the price of a gallon of gas dropped 60 cents in the last two weeks here (oh and lets not forget we are exporting oil and now they want to export liquid natural gas).Wages are stagnating and have been for 20 years. The price of basic food supplies is rising dramatically but that is because we have a whole bunch more people (especially in China) who are now competing for a limited supply.Your biggest fear should be that you wake up one day and realize that the vast majority of Americans live no better off than those in third world countries…Deflation has covered up that fact for a long time….
Are you a gold buyer?
A great artist!
lol, good one.You mention corporate responsiblity and ethics. Drucker always wrote about such things. That’s why I asked.
Correct me if I’m wrong: IB sets the asking price. Market sets the selling price. No one is forced to buy common stock at any price.Maybe I’m not understanding something about IPOs.When a stock hits the street it’s the buyers option to buy or not to buy. Hence the price is set by the market. It may open at the “set price” but that only happens once in a stocks life. If the set price is $20 and the highest bid is $10 then if a seller sells at $10 the price becomes $10. Price of common stock that is traded in the market is set by buyers. A stock cannot take on a new “price” until it is bought at that price, no matter what the ask is, right?
@donnawhite:disqus @andyswan:disqus @kidmercury:disqus We’re sorry you’re seeing some issues with comments showing up. We’re happy to take a look if you would contact me at [email protected] with some details about what’s happening. Are all these comments posted by email? Or are they also posted directly to the thread? Also, some text from a missing comment would be helpful along with a link to the thread where it was posted. Also, Andy, we see the missing comment you mentioned below — how long did it take to show up?
Nope. I replied to two separate comments and each time my name appeared with no text. I’ve noticed that sometimes it takes a few seconds for the text to appear so I waited a few minutes then refreshed and my name also disappeared from the blank reply.