
Goldman docs: Facebook income $355m, revenue $1.2bn (first 9 months of 2010) - necolas
http://www.reuters.com/article/idUSTRE70359V20110106
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necolas
Excerpt:

"Facebook earned $355 million in net income in the first nine months of 2010
on revenue of $1.2 billion, according to documents that Goldman Sachs is
providing to clients.

...

The Goldman customer said he received a separate six-page financial statement
containing information on the social networking firm.

...

The financial statements were not audited and offered little detail about how
Facebook generates it revenue, said the source, who did not want to be
identified because he had signed a non-disclosure agreement."

~~~
luckyisgood
what part of "non-disclosure agreement" he didn't understand :-)

~~~
endtime
Sounds like he understood it fine, since he requested to be anonymous.

~~~
InclinedPlane
That's not how it works. :P

~~~
btilly
Sorry, but that _is_ how it works. It is just not how it is _supposed_ to
work. :-P

~~~
alphabeat
Maybe they wrote a different value on each document as a fingerprint of sorts.
Or maybe they just expected this to get out.

~~~
jrockway
Probably the second one. Financial documents are typically prepared by lawyers
and bankers, not cryptographers.

Or he asked his friend, "hey, can I see your document... yup, they're
identical" and then leaked with impunity. If the public really wants
something, and you send a document with that information on it to a bunch of
people, it's going to be leaked. I think Goldman is smart enough to realize
this; the buzz is helping their business, but they knew they would get in
trouble if they just announced the numbers. So they just gave it to random
people with a I-did-my-due-diligence-NDA and let entropy take care of the
rest.

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michaelchisari
So, assuming this is correct, then we extrapolate their yearly income to
$474m, that puts their P:E at about 105:1

~~~
jerf
At that price, it seems like buying into them is a bet that they will be the
first company to completely take over the Internet, even moreso than Google.

I'm not sure I can buy that, at least not at that price.

(Or, more accurately, a bet that enough other people will think so for long
enough that you can unload your stock on them for a profit. I wouldn't buy and
hold, I don't think.)

~~~
nl
It's worth noting that that high P/E ratio means an expectation in growth in
revenue, not just traffic.

While I think most people expect Facebook traffic to continue to grow for a
while yet, it should also be clear that their moneterization efforts are
pretty still primitive.

For example, did you know it's possible to get > 50% cheaper advertising on
Facebook by selecting CPM rather CPC when you build your ads?

Even ignoring that, in my experiments advertising on Facebook is still hugely
cheaper than on Google (taking the cost of a customer from acquisition to
fulfillment). In any mildly competitive market (like online selling) that
difference doesn't seem likely to continue.

Anyway, my point is that I think that while "completely taking over the
internet" may be crazy, there are plenty of ways for Facebook to easily grow
their revenue by huge factors.

~~~
jerf
I'm pessimistic about that. YMMV. (Note, I'm not saying you're wrong and I did
upmod you. I'm just disclosing my pessimism.)

Facebook's basic play is to build a lot of value into their network by
bringing as many people in as possible, make some pocket change in the
process, then eventually figure out how to milk the surplus value which will
certainly be a large amount of value. My skepticism lies mostly in the
execution of that second step; I'm totally unconvinced there's an ad bonanza
large enough to fund this. Maybe there is. I think somebody's going to
actually have to sell something and it's not clear to me what will work on the
promised scale. That or they're going to have to raise the barrier of entry
and if they do that they'll trigger the open internet competition in a
heartbeat, competition already coming together and will be ready to go when
that happens. The act of squeezing the surplus value of the network is the
exact same act that will create their decentralized open competition.

But hey, who knows. Sometimes you get MySpace, sometimes you get Google. You
tend to only be able to definitely tell them apart in hindsight.

~~~
nl
Have you tried advertising on Facebook?

It's pretty easy. You can select your target audience by gender, location, age
group, and interest(s), and then select if you want to pay per impression or
per click.

It is a good system (just as easy to use as Google's) and it gives good
results. I've tried it, and that's why I'm bullish on them.

(It's worth noting that advertising has funded newspapers for hundreds of
years, television for 50 years, and Google for 10 years and is proven to work
in those cases. I shouldn't have to say it, but apparently some people
continue to doubt that advertising is a reasonable funding model at all,
regardless of the specifics of Facebook)

Another way to look at it: Do you think Yahoo or Facebook is more relevant to
the average user, and what is the trend for each one, and what is the likely
trend for advertising spend on each platform? (Note that Yahoo is currently
worth $22 billion)

~~~
michaelchisari
Advertising is a reasonable funding model, but when the expectations are
unreasonable, then people will question whether advertising can be an
_unreasonable_ funding model, in the sense of positive returns.

~~~
nl
I've sort-of replied to this here:
<http://news.ycombinator.com/item?id=2077931>

Basically, I think there expectations aren't as unreasonable as the large
numbers seem to imply.

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nl
Let's do Math!

Let's see if the $50B valuation is as outrageous as many seem to think. :)

Projecting earnings to $500m for 2010 gives them a P/E of 100.

I agree that a P/E of ~100 is high for a mature company: GOOG is ~24, YHOO is
~22, AMZN is ~75, EBAY is ~14.

Obviously Facebook isn't a mature company at the moment, though, but what
their earnings would have to be to keep the $50B valuation with a P/E of 30?
$1.66B

Earnings of $1.6B is a lot of money, but Yahoo had earnings of $1.4B last
year, and I don't think it's unreasonable to expect that Facebook will be
earning more than Yahoo within a couple of years.

~~~
chailatte
"Obviously Facebook isn't a mature company at the moment"

Mature in terms of what? They are a 7 year old company with 500 Million users
and 3000 top tier workers.

"I don't think it's unreasonable to expect that Facebook will be earning more
than Yahoo within a couple of years."

With that logic, I don't see why Yahoo can't earn more than Google within a
couple of years. All they need to do is to 'focus on monetizing', just like
Facebook can (if they only put their mind to it).

Anecdote: Google converts 15X more than Facebook in my circle of peers that
have used both.

~~~
ig1
No-one disputes search converts more than social ads, the question is cost. As
long as CPA makes it viable people will invest in Facebook ads.

Facebook can improve monetization hugely and they're clearly working on it.

Look at how the new profiles encourages people to list employer and job title,
Facebook have learnt from Linkedin that allowing advertisers to target by
job/industry is hugely valuable. They're going steal a hugely valuable ad
market from Linkedin.

Furthermore local advertising on Facebook is vastly under-utilized, there's a
whole cottage industry springing up of local affiliate firms who act as
brokers buying ads from Facebook and selling leads to local firms.

~~~
chailatte
"They're going steal a hugely valuable ad market from Linkedin." Why? Facebook
isn't known for career/jobs. It's for users to look at fun photos, chat, and
play games. I contend it would be hard for Facebook to be known as a
professional site (let alone have the credibility for advertisers to migrate
en masse)

"Furthermore local advertising on Facebook is vastly under-utilized" If we
both already agree that search converts better than social ads, why would
local advertisers switch from Google to Facebook? If it's only about price,
Google can undercut Facebook in an instant.

EDIT: If anything, the recent attempt to add job/career to profile page for
Facebook smacks of desperation. Like trying to go after an established market.

~~~
ig1
Advertisers don't care if it's a professional site or not. Look at the Oracle
ads in consumer news magazines. Companies will advertise where they can reach
their target market.

Right now on my Facebook page I have two professional ads (one for a CRM
system and one for a business IT news site) and two Facebook game ads.

On top of that Linkedin is truly awful when it comes to targeting. Their job
categories are ridiculously broad, if you want to target Software Engineers or
Aero Engineers, you can't. Instead you have to target "IT" and "Engineering" -
categorizations which combine together barely related roles.

It would be very easy for Facebook to offer more precise targeting, that alone
would be a killer feature over Linkedin.

Search has a higher CTR but not a higher eCPA, a well designed Facebook ad can
convert much more cheaply than buying targeted keywords, you'll need to buy
many more ads, but the end cost is what matter.

(Incidentally most local companies don't advertise online at all, it's not a
case of stealing customers from Google, etc. but rather a case of persuading
them that it's worthwhile. Hence the rise of local ad brokers who buy CPM and
sell CPA, as it's much easier to convince a local business to advertise
through you if they don't have to pay you until after you generate business).

~~~
chailatte
Most advertisers don't have the budget/time/patience to run and manage
ineffective ads across multiple sites. Especially when you know your Facebook
users have a mindset of 'fun', i.e games, chatting, photos. Sure, some
companies have huge budgets (oracle), and some companies are just trying their
luck (small CRM company), but that's no way to have a very profitable
advertising platform. Sooner or later these advertisers will leave for greener
fields. After all, what good is ads targeting, when the users ignore the ads
to play games/look at photos?

As far as cost for ads is concerned, I don't think Facebook stands a chance.
Google can undercut Facebook anytime with their 30 billion dollar cash
reserve.

~~~
ig1
Consider it from an advertiser prospective if you make $5 per customer, and it
costs you $1 to get a customer from Facebook, then you'll quite happily keep
paying Facebook $1 for as long as you keep getting customers. If Google
undercut them and offer you ads for $0.50, you'll buy both !

I currently buy ads at Google, Facebook, Linkedin and PlentyOfFish. Find me
another source of effective advertising and I'll advertise there too.

Unless your margins are razor thin and you have tiny volumes, it seems
unlikely that the extra time you have to spend managing your ad campaigns
would justify not using them. After all just because the CTR of Facebook is
smaller than Google it doesn't mean you have to invest more time into it
because your ad has to be seen 100x more often to get the same CTR.

~~~
chailatte
That was a mispeak. I should've used 'money-losing' instead of the word
'ineffective'. My point is there are only certain ads that is money making on
Facebook, thus my reference to users' mindset of 'fun'.

------
vaksel
personally I think that the 50 billion valuation is just a negotiation tactic.
They start off at 50 billion, so that when they actually IPO at 25 billion,
everyone will think they are getting an awesome deal that will double their
money in no time.

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hessenwolf
In pitching as much as $1.5 billion in stock in the closely held social-
networking company to wealthy investors, Goldman Sachs disclosed that it might
sell or hedge its own $375 million investment without warning clients.

Source: [http://www.bloomberg.com/news/2011-01-07/goldman-efforts-
to-...](http://www.bloomberg.com/news/2011-01-07/goldman-efforts-to-burnish-
image-may-be-undermined-by-facebook.html)

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joe-mccann
So based on $133/million per month in revs is ~ $1.6 billion this year.

Current valuation on SecondMarket = $50 billion

$50 billion/$1.6 Billion = a 31.25 multiple.

5 to 10 times revenues seems to be a reasonable way to value startups/private
companies nowadays (for the most part). But a multiple of 31.25? Wow.

~~~
prostoalex
I think the logic of a growth investor differs from the logic of a P/E chaser.

Dividend yield is probably 0%, too, so if that's what one is after, it would
seem like a crappy deal.

~~~
joe-mccann
True but I'm not mentioning earnings at all; simply based on revs seems like a
LOFTY valuation.

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alexyim
So it seems that Facebook is generating significant profits, unless something
funky went on in the last few months, so why take such a large investment?

~~~
nrb
It's a win-win for Goldman and Facebook. Facebook gets a sky-high $50 billion
valuation, and Goldman gets dibs on underwriting a potential Facebook IPO.

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hessenwolf
Assuming no growth; risk free + equity risk premium = 8% + company lasts
infinitely (or for a long time): 355 _1e6/.75/.08 = 5.91_ 10e9, or 6 billion.

Let's assume they grow to five times their current income over the next five
years; and, ooh, I am busy - just multiply the previous number by five to get
an approximation.

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Aegean
350M income, $50B valuation? So with today's facts you get your investment
back in 142 * 3/4yr = 106 years?

~~~
jamesaguilar
Assuming flat income for that period. You think this is a safe assumption I
guess?

~~~
varjag
Good point, but the valuation is supposed to go higher when Facebook IPOs.

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herdrick
Still undervalued. Goldman got a good deal.

~~~
scorpion032
Well tried, Goldman!

------
axiom
Well, a P/E of 100 isn't that outrageous, especially given their growth rate.

~~~
redthrowaway
Their growth rate can't be expected to continue. They have to have peaked,
just given how many people are really using the Internet (excluding China,
natch). They've likely saturated the US, which is by far the most valuable
advertising market. Any further growth will suffer from diminishing returns.

Facebook's financials are nice, but I'd really like to see their usage and
growth statistics, broken down by country. I don't think they can count on
growth for much longer; they're going to have to monetize better. They're
trying to do that by developing facebook as a platform, but the future in that
regard is far from certain.

Google's P/E is ridiculous, but they have solid profits from ads and they're
expanding hugely in mobile. Google's growth can be expected to continue, at
least for the foreseeable future. I don't think we can say the same of
Facebook with any degree of certainty.

~~~
yequalsx
Their growth rate in new users can't be expected to continue but their growth
rate in revenue might be justified. Clearly Goldman thinks their plan for
revenue is quite good and they expect Facebook's revenue to greatly increase
while maintaining a sufficient profit margin. I expect we've only seen the
beginning of their revenue growth.

~~~
redthrowaway
I don't think Goldman's investment can necessarily be taken as a sign of their
confidence in facebook's financials, or its future ability to justify its $50B
valuation. Rather, it should be taken as a sign of Goldman's confidence in
their own ability to profit from the deal, both from the private $1.5B sale of
stock, as well as its favoured position come facebook's inevitable IPO.

~~~
danenania
Exactly. Look no further than subprime if you doubt this. There is no group
more expert at (knowingly) inflating a bubble for their own gain. And they
take no risk because they get 0% loans from the Fed and are the definition of
"too big to fail". This is dangerous behavior.

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mkramlich
So if you bought the whole company at a $50b valuation, and assume that this
$355m/yr profit rate for first 9 months held constant and therefore turned
into $473m total by end of year, and then that rate held constant each year on
forward, and that all profits were always and evenly distributed to all
shareholders, then you'd recoup your investment (merely break even, anyway)
after 105 years.

Add in an unpredictable future growth rate. Add in the fact that they're
probably approaching a hard cap on users in the next year or so. Add in
bubble-ishness. Add in a big unknown as to whether they find ways to better
monetize their users. And all this adds up to telling me either this is a bad
investment, or, maybe just maybe it will at least break even within your
lifetime. Can't say. But from this data I think it is not clear that this is a
slam dunk buy at all. Either bad or meh.

~~~
JonnieCache
Goldman have a _lot_ of other ways of profiting from this other than simply
taking a share of FB margins. For a start, they get to be in charge of the
entire IPO process. That alone will be _very_ profitable for them.

There was a bunch of other stuff like this discussed in the threads on the
goldman investment itself.

~~~
mkramlich
agreed. plus Goldman can profit on the Greater Fool effect. i was just
assuming that, if you weren't Goldman, and weren't going to take advantage of
the Greater Fool effect, etc., and you wanted to buy-and-hold rather than buy-
and-flip, then, the numbers don't look too compelling at the $50bn valuation.

but yeah, anything can happen, and there are lots of factors involve.

