

Ford vs Facebook - asto
https://plus.google.com/106909838320943141098/posts/PXGiGug9qBn

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jwilliams
Capital will ("should") flow to where it can be the most useful at producing
wealth.

This is just the market saying "I'd rather see what Facebook can do with X
billion than Ford."

Which on the face of it seems fair - Google had a similarly crazy PE when they
floated. They grew into it pretty quickly though.

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johnhartigun
Investors don't invest because of curiosity. They want to earn money.

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photon137
Investors care about marginal returns. An additional $1 invested into Ford
won't bring as much returns as an additional $1 invested in Facebook.

Ford's is a capital-intensive business. That's what gives it hard assets that
make its market cap 70% of assets (btw, the author totally forgets the
liability side of equation - equity investors aren't owed assets - they are
owed (assets - liabilities) - look at big banks, they have trillions in assets
- but they have equally enormous liabilities too).

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D_Alex
"An additional $1 invested into Ford won't bring as much returns as an
additional $1 invested in Facebook."

I don't know what investment opportunities Ford has, but regarding Facebook, I
really don't think they _can_ invest additional capital sensibly. An
additional $1 invested in Facebook will end up being an additional $1 paid for
some Instagram-like acquisition.

Furthermore, additional $$ spent on Facebook IPO stock will just end up an
additional $$ in the founders' pockets.

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HackersCapital
Ford IS more valuable that facebook. This guy's analysis is an apples to
oranges comparison. Ford has $100.5 billion in debt and facebook has no debt -
the companies should be compared based on enterprise value:

Enterprise value in billions = market capitalization + debt - cash

Ford’s enterprise value = 40.4 + 100.5 - 15.2 = $125.7 Billion

facebook’s enterprise value = 90 + 0 - 1.5 = $88.5 Billion

See here for a post I did on this article: <http://hackerscapital.tumblr.com/>

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photon137
Wrong.

EV should include debt at _market value_.

FB could just as easily issue debt in billions and I'd think that the market
will be valuing it higher than that of Ford's for the same issue coupon (which
just came back into the investment grade club after residing in the junk club
for quite a while). FB would probably have a good income-to-interest coverage
ratio if it ever issued debt so the discounting of its debt's cashflows would
be less severe than that for Ford.

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HackersCapital
I will take a look at the book value of Ford's debt tomorrow on Bloomberg. I
agree that the market value of debt should be used for the analysis, but I
don't think it will change the conclusion.

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photon137
It will. Issued debt rarely ever trades at 100 (except in special cases - ie
debt near maturity etc).

And, in any case, you cannot compare market values of two companies with
different leverages such as FB and Ford without renormalizing earnings to the
same leverage level. Earnings on equity are amplified if the company has debt
(which Ford has). FB has no leverage - its unleveraged earnings give it a
whopping market value of $95B. Ford can't even manage half of that figure with
its $100B (!) of debt.

Edit: I am relying on your figures.

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alexmgrove
Issued debt typically trades near par (100) unless the borrower's credit
rating has changed or interest rates have changed (both of which happen all
the time, but still, the vast majority of debt trades in the 90-110 range.)

You can compare two companies with different levels of leverage. They both
have Enterprise Value (EV), which is normally calculated as operating income
(EBITDA to be precise) * a multiplier. Market capitalization, or equity value,
is by definition the different between the EV and the net debt (debt - cash).
(P/E ratios are usually not as useful as the EV/EBITDA approach for
understanding a company, btw.)

One company may be highly debt financed and the other may be pure equity
financed. As you say, debt financing supercharges equity earnings (see below),
but this comes at a higher risk. And in principle, the higher earnings are
balanced out by the higher risk and therefore enterprise value is unchanged.

What is a bit harder is comparing two companies in entirely different
industries, like Ford and FB!

Equity returns are supercharged by debt because in a growing company debt
coupons are cheaper than equity returns. e.g., say you invest $100 to build a
company that makes $20 a year. You get a 20% equity return. But imagine you
invest $50 and borrow $50 to build a company that makes $20 a year. Your debt
pays a typical 5% coupon, so you pay 50*5% = $2.5 in interest. The remaining
$17.5 goes to your equity and you get a 35% equity return. BUT if you're
unlucky and your earnings are delayed one quarter, it's the bank that gets
your 35% equity return cuz you bankrupt, sucka.

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photon137
"...but still, the vast majority of debt trades in the 90-110 range."

That's usually for freshly issued/on-the run or about-to-mature debt. It
_used_ to be the case before the financial crisis that most debt traded near
par - that has changed as the cost of repo financing has become disjoint of
the risk-free rate since the crisis.

EV/EBITDA is the multiple to compare - as you rightly pointed out. A naive EV
comparison, as done by HackerCapital, is misleading.

The description of leverage is also a bit simplified - typically, you would
discount earnings with the weighted average cost of capital (WACC) = (cost of
debt) _(debt/EV) + (cost of equity)_ (equity/EV). So the discount factor does
not simply "balance out" the leveraged (and volatile) returns - it depends on
the relative cost of debt vs. equity _and_ the leverage ratio.

It's in the (cost of equity) factor that you can normalize different sectors
as (cost of equity) = risk_free_rate + historical_beta * (sector_return -
risk_free_rate). Sector return would typically be from a benchmark equity
index specific to the industry - whether tech or autos.

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DVassallo
_Value is being determined based on activity (page views, ad impressions,
users), instead of real things like... you know... money and assets._

Users, pageviews, etc, _are_ assets. If the market will be able to determine
their "correct" value... that's another question.

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AndrewDucker
Users and pageviews are _potential_ assets. You cannot sell either of those
things, but you might find ways of making them produce money.

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DVassallo
There are many other intangible assets that produce money but are not easily
sell-able: Trademarks, human capital, trade-secrets, other intellectual
property, etc.

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muyuu
All of these would be in Ford's side without any doubt. Maybe profit-per-
capita is the single benchmark they'd clearly lose at, and the fact that their
workforce is largely unionized, which is a serious risk in times of hardship
(they'd find themselves unable to cut expenses significantly, as it has
happened many times in the past).

Ford vs Google might be a close one in terms of IP - hard to compare across
industries though - but vs Facebook it's quite one-sided for Ford.

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TazeTSchnitzel
Perhaps it's a bubble, but Facebook is used by an eighth of the people on the
planet.

Tell me that's not an asset. A single company has lots of information about
and can display advertising to an eighth of the alive human race.

Then again, so does Google, I suppose.

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excuse-me
The English language is spoken by a larger number - that doesn't mean the OED
is worth a trillion $

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TazeTSchnitzel
The OED doesn't know your social connections, your sexual orientation, your
date of birth, your address, your previous address, your current location,
your gender, your age, your interests, your employer, all the websites you've
visited or even what you look like.

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tatsuke95
So, they have good information for advertising. And that's going to valuable,
no doubt...

...but that's it. They aren't building a physical product, they're going to
sell other people's products. Or, sell information so that other people can
sell other people's products.

I find it absurd that the market for web based adverting, between Google and
Facebook and others, can be this valuable in the long run. These are
_advertisers_ , for crying out loud. People can talk about how many users
Facebook has, but _there are more automobiles worldwide than there are
Facebook users_.

What is worth more; a car purchaser, or a Facebook user?

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egknight
NBC Universal has done pretty well with an advertising funded business model,
very valuable for a long time. Facebook does have a product. It is just
intellectual, not physical. Also, they have good information, AND a stage to
sell advertising. This is, and will continue to be, a killer combo that I
would want my money in.

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rbn
Also. We don't know what is in the pipeline for the future. Who would have
thought Google would build a dominant Mobile OS? Even Google didn't know!

Also it's good to note that their are companies being built on top of
Facebook. Zynga is an obvious one but there are many smaller game companies,
ad companies..ect and Facebook takes a cut of all of these

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bgentry
_This is the Dot.com era all over again_

The "dot-dot-com" era?

~~~
sandieman
Dot 2.0

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moocow01
The other thing that isn't reflected is staying power or perhaps it might be
called company lifetime revenue/profit/etc.

Historically for internet based companies this metric on average has been very
low especially when put in comparison with the auto industry.

Where Facebook will be in 5-10 years is just about anyone's guess.

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rmATinnovafy
Buy F now.

It is paying a twenty cent dividend on a stock price of about $10.

Cheap. Plus its making cars that are very competitive.

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firefoxman1
<http://www.youtube.com/watch?v=8ZwvImsYo4E>

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rmATinnovafy
Would you mind explaining what the video is about?

I do not use youtube.

Thank you.

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firefoxman1
Its just a 6 minute interview with the CEO (the guy who came in and saved the
company from near-bankruptcy) and is now pushing to make Ford an investment-
grade stock.

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rmATinnovafy
Thank you.

Mullaly is indeed a charismatic CEO. He ignited the culture in the company.
Going as far as giving engineering the tools and respect it deserved.

The old Ford was run by accountants. It is now more balanced.

Isn't it incredible? How one of the oldest startups in the history of the
U.S.A. has managed to come back?

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firefoxman1
Quite a feat. I think a big key to Ford's comeback is, like you said, enabling
engineering to drive the company forward. It probably helps that Mullaly was
once an engineer himself.

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jerrya
Certainly what makes Facebook valuable is their huge network which is
sustained, I think, through barriers to entry (network effect), and barriers
to switching (owning your data).

I wonder what might happen, if it could happen that the EU or US FTC mandates
api access into and out of Facebook, perhaps after a decision that 2015 Man
will use social networking as a needed public infrastructure, to be provided
on a common carrier like basis.

Can the sheer size of Facebook's network trigger monopoly break up? Or the
sheer size combined with lack of API access?

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TazeTSchnitzel
Facebook does make it surprisingly easy to get a copy of all your data.
There's a single big button on the site which will make a ZIP file containing
all your data on Facebook, except for data stored in Apps (outside of FB's
control), and comments you've made on other people's posts. It will even tell
you your previous IP addresses and I think auth tokens.

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jerrya
I'm thinking more of API access so that external apps can be created to link
Facebook to other networks, so that tweets and google plus and tumblr posts
and all that stuff can just flow from one network to the next like telephone
calls can do now.

I just clicked on "Start my archive", Facebook will email me when they are
done zipping it up.

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moocow01
This was more or less what Opensocial was trying to do but I believe it is
pretty much dead.

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rabidsnail
Valuation lower than assets means you get eaten by corporate raiders, unless
you're as big as Ford or the majority of the stock is held by a single family.
That just shows how unhealthy Ford is.

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siavash
Could you please elaborate on this?

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Lexarius
Suppose that someone is able to buy up enough of your stock to essentially own
your company, and they notice that the cost of doing so is less than the value
of all of the things your company owns. Someone could make a profit by buying
your company and then butchering it, keeping a few prime cuts for itself and
selling off the rest.

This doesn't happen if the raiding company can't put together enough money to
make the purchase, or if not enough of the stock holders are willing to part
with their shares.

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powertower
> You forgot one important thing: Potential for Growth

The key to understand this madness is so right in front of our faces, that we
can't even see it.

Due to the dynamics/nature of the market, stock investments seems to be more
about a gamble today, and you can't gamble on Ford too much except for it to
go down.

Forget trying to spot the value. It's all about what's hot.

Hence Facebook is getting crazy valuations.

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firefoxman1
That's how I used to feel too until I read more economic history. Turns out,
that's the way it's always been. At the end of the day, stock prices are
_100%_ driven by supply & demand (beside the IPO price I suppose).

Sure, fundamentals are what a lot of people _base_ their buying or selling off
of, but what's "hot" is all that matters just like it always has. Maybe a
company just crushed their numbers for the quarter or a drug company attained
a new patent; and while that may contribute to the true value of the company,
when it comes to the stock price nothing matters except how many people buy.

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teyc
These two businesses are in entirely different industries. Not only that, they
have very different market characteristics.

Ford is a capital intensive industry that reminds me of Berkhire Hathaway -
the textile company that Warren Buffett could never figure out how to make
money from. It has competitors everywhere making relatively undifferentiated
products.

Facebook on the other hand, is more like a media company. It has 1 billion eye
balls who spend an average 30 minutes a day on its site on user-generated
content. If you were a TV station, how much would you be valued at with that
kind of metrics? FB has a beachhead in the sense that it is a marketplace of
users who create content, and users who view them. This makes it incredibly
sticky and also difficult for a competitor to come about. The downside with FB
is that audiences can be fickle. If they think FB is a fad, they will start
leaving. Therefore, FB had to establish itself as a habit-forming medium, like
e-mail, so that people constantly reengage with it.

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firefoxman1
> _You forgot one important thing: Potential for Growth﻿_

The problem arises when that growth occurs but instead of the price now being
reasonable at those levels, it increases further...which is probably what it's
going to do.

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hartror
This is why investing in stocks is also called speculation, investors are
speculating that Facebook's revenue and profit is going to grow to exceed that
of Ford in a reasonable amount of time.

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michaelochurch
I've heard so many people talk about buying Facebook "as soon as I can get
in". I think that's ridiculous. When it comes to individual stocks, buying or
selling without concern for price is for suckers. That's what got us into the
last bubble (or few): people who would buy something (like a house) regardless
of the price based on an obscene overconfidence that it would appreciate.

I have no idea what the thing's worth, but I cringe when I hear people talking
about how they're sure it's a good bet because of some X which is almost
certainly already priced into the market.

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swah
People still feel like that about investing in land and houses (where I live
at least) - they are seen as an investment that is never going to be a bad one
(freqently comparing this to renting a place to live).

But there is got to be a catch.

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forkandwait
I am personally a lot more likely to log on to Facebook than to EVER buy a
Ford -- just saying.

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vibrunazo
The point is that even tho you are logging to facebook, you are not paying
them as much as those buying fords.

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potatolicious
But we know that the auto industry is cut throat and low-margin. Paying $30K
for a Ford doesn't mean Ford just made $30K. Between manufacturing, R&D,
marketing, and raw customer acquisition cost (dealerships aren't free), I'd be
surprised if Ford walked away with 5% of that.

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vibrunazo
That's why the author specifically mentions profit, which Ford has 8x more
than Facebook.

