

$10bn - Is Facebook overvalued? - cyno
http://wallen.typepad.com/wallen/2009/05/10bn-is-facebook-overvalued.html

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mdasen
That depends on whether Facebook can ever monetize their users to an extent
great enough to generate the profits that would cover such a valuation. Right
now it's not looking so good. There is only so much growth they're going to
get in the west (which is where users are worth money) and growing elsewhere
is more of a strain on resources than something that will generate revenue.

Search advertising seems to monetize so much better than pretty much anything
else on the web and that's why Google is sitting pretty. Advertising just
doesn't seem to monetize enough on Facebook and the like and the average value
of their users keeps going down as the purchasing power of a lot of their
growth is small.*

*That's not to say that poor people aren't wonderful, just less valuable to advertise to.

~~~
lallysingh
Indeed. Most people I know stop using facebook after college. That bounds the
applicable age group to just those who have lots of spare time to use
facebook's servers, but with little money to spend on facebook's advertisers.

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mikeryan
Really - making valuations on a per user basis? Kind of weird especially
considering their growth.

Currently Facebook is projecting $550M in revenues this year, that would put
them at about 20x earnings (for 10B valuation). That doesn't consider
profit/loss but its a standard measurement. This is a moderate 20x P/E for a
growing company and not a horrible valuation.

compare that with twitter's $0 in revenues and you have a better comparison.

Youtube is projecting about $240M in revenues
[http://newteevee.com/2009/04/03/analyst-youtube-could-
lose-4...](http://newteevee.com/2009/04/03/analyst-youtube-could-
lose-470m-this-year/) But with a higher burn rate per user so its way further
in the hole.

MySpace is projecting $490M in revenues so it's inline with Facebook
considering they're very close to the same rate, I have to believe that
considering the way facebook is growing compared to MySpace that it would get
a better valuation (if comparing the two side by side as standalone
businesses)

All revenue numbers from pretty much first google hit

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mdasen
Just to clarify: earnings are not revenues. Earnings are revenues - costs.
Facebook and Twitter's valuations are both infinitely times their earnings
since neither has any earnings right now. However, their negative earnings are
still important (especially on a per-user basis).

So, Facebook's P/E ratio is non-existent since they have no earnings.

~~~
eru
Not infinity. More like a negative number.

(Otherwise, I agree.)

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edw519
The one thing I remember from Professor Rossell's managerial accounting class
in Business School: There is only one response to _any_ financial question:

"Who wants to know?"

For example, "How much did you earn?"

To the stockholders: "A lot."

To the employees: "A little."

To the IRS: "Nothing."

I imagine Professor Rossell's response to "Is Facebook overvalued?" would be,
"To whom?"

~~~
byrneseyeview
In the short term, the price is determined by the dumbest person with access
to a checkbook. In the long term, the price is determined by smart people,
because the dumb people are broke.

~~~
bdr
That's only true if it's overvalued. If it's undervalued, the price is
determined by the smartest person with access to a checkbook.

~~~
byrneseyeview
I guess the dumbest optimist, then. If all the idiots are pessimists, too,
your case is valid. And that does happen.

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jemmons
Yes.

~~~
cellis
No.

~~~
Dilpil
Seems we got a little poll going here.

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jasonlbaptiste
Here's the deal. Facebook's ads are more like Google's content network.
Google's money maker is keyword search based ads.

Most will tell you that the content network is complete and utter shit. A lot
of people lose money there.

The search network is much more targeted due to its nature to target based
upon search keywords.

Facebook will always be worth something and probably a very valuable
something, but it's not of 10 billion or Google proportions if the basis is
upon "advertising".

~~~
trickjarrett
The value to advertisers is in the ability to target their ads. To be able to
prequalify people based on their searches was a major technological advance
over the unqualified banners sites display.

Facebook is attempting to mimic the prequalification in its use of your
interests, your groups, fans, etc all that can be used for advertisers to
filter. At this point it's fairly rudimentary, but imagine in the future when
the system can apply some intelligence in determining whether or not I'd like
to see ads for some product based on all the information Facebook has about
me.

The potential is there, but it is not yet fully matured.

~~~
braindead_in
The same reasoning can be applied for Twitter.

However the technological breakthroughs needed for such a system is still not
in place. Facebook/Twitter has to put in a log of research into Natural
Language Processing Technologies for this scenario to materialize. The cost of
that is still unaccounted for.

However the value of correct data is very important here. No doubt the data
Facebook has about its users is very valuable. Especially considering the fact
that there is a real person on the other end, with a significant amount of
real life relationship amongst his/her friends list.

Someone still needs to figure out how can that data be converted into dollars.

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Frocer
I think the argument is flawed to begin with... $/user is just a bad
comparison. I am no investment banker but I'd think valuations are calculated
via a combination of revenue + growth.

If we look at Facebook's estimated 2009 revenue, which is $550M reported by
TechCrunch, the valuation is about 20x. It's a bit overvalued at this point
but not unreasonable, especially since Facebook's project revenue almost
doubled 2008's.

~~~
jonknee
Revenues are nothing without earnings though. Facebook spends more than it
takes in, which can easily be accomplished by anyone (especially as of late!).
The valuation is purely on a bet that in the future Facebook will be have more
revenue generating capacity. It's a bet, albeit a big one. With so many users
it doesn't take a whole lot of profit per user to get to big revenues, but
it's far from a sure thing that Facebook will end up worth anything
substantial.

~~~
Frocer
Revenue is much harder to get than profit. As an ex-consultant, you can always
cut cost to achieve better profit margin. Revenue is a different story.

You are right that valuation is on a bet that Facebook's revenue will continue
to grow. But judging from past performance, and Facebook is still a startup, I
think it's a pretty safe bet (comparing to Twitter anyway!).

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rjurney
The funny part of the social media bubble is that if you looked at the dot-com
era, it looks like financial fraud just like the housing boom: VCs going
public with a domain name and no product shipped to cash out before the
inevitable implosion.

Except now there is no going public, SOX killed IPOs and the M&A market is
hurting too and yet... they're still doing it. So they must have been honest
the first time! :)

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dustineichler
Does it matter, the color of money is (dollars) is still green. Fb has the
users, they should get the highest valuation.

