
If Facebook is Worth $50B, Apple is Worth $1.4T - macco
http://blog.vuru.co/post/2632452622/if-facebook-is-worth-50b-apple-is-worth-1-4t
======
andreaja
Is it just me or are people blowing that "$50b" valuation of facebook out of
proportion? And applying P/E * Profit to other companies doesn't really seem
like an interesting metric, especially when comparing it to well-established
companies. Buying Facebook shares right now at 100 P/E seems like a long bet
that absolute profit will improve within the next N years (where N is some
acceptable length of time for the investment). That's all. The $50b valuation
is _obviously_ (to me anyway) not based on current numbers, but expected
future numbers.

The amount of indignant disbelief going on is amazing. I would understand this
if the OP's money was being invested against his will, but when GS and others
are making this bet with their own (or their trusting clients's) money,
where's the problem? Are people angry at FB for being popular?

~~~
yoseph
Hi andreaja,

Thanks for the response. I'm the author of the article (Macco, thanks for
submitting it!).

You're right that the $50B valuation isn't based on current numbers. It's
based on what Facebook _might_ be able to do in the future. Imagine you were
buying a house. It's a great house, has a solid foundation, beautiful
interiors, and is in an excellent neighbourhood that is constantly
appreciating. Would you pay what it _might_ be worth in 3 years, today?

I understand the argument about growth, but even from that end, it doesn't
completely stand up. If we were to use the PEG Ratio
(<http://en.wikipedia.org/wiki/PEG_ratio>), for Facebook to be fairly valued
at $50B, it has to grow its Net Income by 100% annually, on average over the
next five years.

It's possible Facebook might be able to do that next year, but then it'll have
1 billion users. That's 14% of the world's population. That's huge. Being
generous though, let's extend that 100% growth into the year after. Then,
Facebook would have 2 billion users, 28% of the world's population, and
assuming current margins, they would only be eeking out $2 billion in profit.

Will it be worth $200 billion then? I would say no and I would say Facebook's
not worth $50 billion now.

~~~
semanticist
Facebook's income doesn't need to grow linearly with their number of users.
They could, instead, look at ways to make more money per user.

Since they've been spending their time until now focussed on getting lots of
users, I'd imagine it's safe to say that they could increase their revenue per
user well beyond what it's currently at.

~~~
yoseph
I hope, for the sake of current investors, they find other ways of monetizing
users. But my example is intended to illustrate the overvaluation based on
present methods of monetization.

Nevertheless, I don't think it's a safe assumption that they could increase
their revenue per user well beyond its current level. Generally speaking, it's
pretty tough for free services to monetize themselves. The only routes seem to
be ads & taking a cut of revenue from apps that run on its platform.

Facebook would really have to pull a rabbit out of its hat to increase its
revenue per user well beyond its current level. It's certainly not a safe
assumption.

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jboydyhacker
This is not an appropriate use of a PE multiple because different companies
have different growth rates at various stages. The earlier the life cycle, the
higher the PE given potential growth later on is much higher. This post is
actually pretty misleading and gives people the wrong idea about how PE
multiples should be applied.

~~~
yoseph
jboydyhacker,

You're right that different companies have different growth rates at various
stages. But, to me, it still doesn't add up.

From another comment I made below: "I understand the argument about growth,
but even from that end, it doesn't completely stand up. If we were to use the
PEG Ratio (<http://en.wikipedia.org/wiki/PEG_ratio>), for Facebook to be
fairly valued at $50B, it has to grow its Net Income by 100% annually, on
average over the next five years.

It's possible Facebook might be able to do that next year, but then it'll have
1 billion users. That's 14% of the world's population. That's huge. Being
generous though, let's extend that 100% growth into the year after. Then,
Facebook would have 2 billion users, 28% of the world's population, and
assuming current margins, they would only be eeking out $2 billion in profit.

Will it be worth $200 billion then? I would say no and I would say Facebook's
not worth $50 billion now."

------
xiaoma
Neither P/E, nor PEG are useful metrics when dealing with a young growth
company.

Consider this: There was a time when Yahoo! had many potential customers and a
substantial business and technological lead over the competition, but no
positive earnings. The same was true more recently of Genzyme, currently a
multi-billion dollar biotech company. Would it be reasonable to assign zero or
negative values to such companies? Of course not.

And what happens when a high-tech growth company climbs up from a small
negative earnings to a small positive earnings? Suddenly instead of having an
undefined P/E, they have a very high P/E. This is reasonable. A solar power
company with 500m in sales and 1m in earnings that had 200m in sales and
hugely negative earnings in the previous year could very well be worth over a
billion. If the market gave it such a valuation, gawking at its P/E of 1000,
and then applying the same P/E to an established company like Kraft would just
be a waste of breath.

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rlmw
I believe the valuation that Facebook is running on is predicated on an
expectation of sustained future growth. Apple is a fast growing company, but
I'm not sure that you can expect them to continue to grow at their current
rate for as long as you can expect facebook to continue to grow at.

The Smartphone market is growing very fast, but Apple have competition in this
market now that Android has started to grow. I'm not saying Apple are loosing
much marketshare, more than while a year ago it looked like they going to gain
marketshare in a market that was growing, while now they are holding their own
in a growing market.

Facebook doesn't really have any serious competitors - myspace has slowed in
terms of growth and is possibly shrinking while linked in are aiming at a
different market. The only thing even on the horizon that could undermine them
are federated social networks - and its far from proven that they are what
consumers want.

Its a high valuation and does smell like a bubble, but I wouldn't be surprised
if Facebook hit $100 billion when they IPO assuming they can get to a billion
users by then.

------
othermaciej
Dear stock market, we think you should seriously consider adopting this method
of valuation to AAPL, effective immediately.

Sincerely, Apple Shareholders

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steveplace
P/E should not be considered in a vacuum. The high valuation probably exists
because there is a large expectation of earnings growth. I don't know if we
can eyeball a PEG on FBOOK yet as we don't have the proper data but it's
probably much different than AAPL (and especially T!), at least in the eyes of
the investors.

~~~
yoseph
Steve,

Thanks for the comment. See my comments above for my discussion of the PEG
ratio in this situation.

------
nivertech
Some relevant thoughts:

* Facebook is effectively a monopoly - when regulators will start limiting its growth?

* Chinese market - without it Facebook will need to expand interplanetary by creating colonies on Moon and Mars.

* I think with 90% probability, that there will be another opportunity to buy FBOOK shares under $50B valuation after IPO (movements in public stocks are 80% general market sentiment and only 20% company performance).

------
lkrubner
It is confusing that such an obvious over-valuation can be taken seriously at
the end of such a long and deep recession. The valuation is straight out of
1999, but back then USA was undergoing the longest economic expansion it had
ever known.

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Jabbles
Things (shares, companies, objects, currencies, oppurtunities, gold) are worth
what people will pay for them. That's it. There is no objective "value" other
than that.

~~~
ekidd
This isn't always true.

A company is worth the expected net present value of all future dividend
payments. If a company is both unsexy and well-managed, you may be able to buy
its stock at a very good price, and then collect a fat profit of the
dividends.

~~~
eru
To be a bit more pedantic: You have to include share buybacks and a possible
(last) liquidation dividend.

------
broofa
Value

^_____________________●●●●●●●●●●●●●●●●●

|____________●●●●●●●●●

|_________●●● <\---- Apple

|_______●●

|______●

|_____●

|____●

|____●

|___●

|___●

|___● <\---------- Facebook

|__●

+----------------------------> Time

~~~
tybris
Nice graph, except there's virtually nothing that's worth more than Apple.

~~~
jambo
Interesting. Just went and looked and was surprised to find that only one
company is valued more than Apple in the US markets. Exxon Mobil (382B) >
Apple (307B).

~~~
goatforce5
Exxon is the only company bigger than Apple anywhere in the world, apparently.
Apple recently overtook the former world #2 company, PetroChina:

[http://www.bloomberg.com/news/2011-01-05/apple-passes-
petroc...](http://www.bloomberg.com/news/2011-01-05/apple-passes-petrochina-
as-second-largest-company-in-world-chart-of-day.html)

------
tybris
and Exxon Mobil?

Investors are offering a price because they expect a good ROI for that price,
nothing else.

