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Goldman docs: Facebook income $355m, revenue $1.2bn (first 9 months of 2010) (reuters.com)
76 points by necolas on Jan 6, 2011 | hide | past | web | favorite | 64 comments


"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."

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

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

That's not how it works. :P

Sorry, but that is how it works. It is just not how it is supposed to work. :-P

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

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.

Hopefully the leaker was smart enough to perturb the values somewhat as well :)

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

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.)

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.

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.

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)

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.

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.

Salesforce is trading at over 250 times earnings: http://www.google.com/finance?q=NYSE:CRM

Well, I don't think I'd buy-and-hold that either.

I want to jump up and down and yell "bubble" as much as the next guy, but I do have to admit this one seems relatively focused... at least at the moment. Just a small handful of companies trading way above what they "should" from a buy-and-hold perspective.

Exactly. I think most people looking at facebook are expecting it to be a bubble, but they're hoping that getting in pre-IPO will get them a large discount. I wouldn't be surprised if many of them are looking to dump when facebook IPOs.

thing is, internet is a fragile market. Especially in social, if something else becomes hot, users can go away very quickly. It's not like some manufacturing business where you build relationships over years.

Some possible risks:

* Orkut-like sites were around for a long time, now nobody uses them today. People shifted to facebook and may move elsewhere.

* It is possible that a decentralized, autonomous solution may come up for social profiles.

* The fact that the company is not mature is a double-edged sword, a new idea or feature may come up that may well make facebook a less attractive place to be.

The P/E for Baidu is 83, Amazon is 75, Netflix is 68. PE of 100 for Facebook isn't outrageous. If they implement Groupon without pissing off their users, they'll easily earn tons of money.

You might be interested to know that this is not unique - Baidu's PE ratio is almost 90 at the moment. (Not to say that both aren't overvalued.)

P.E. of 105 is fine, as long as they can

1) Grow at a crazy rate (which I doubt they can)

2) Increase their revenue with the existing userbase (which they can do, but not at 5X)

They can also reduce their spending, but that alone will not take them to a reasonable P/E.

Basically, their valuation should be at 15-20 billion, at best.

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.

"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.

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.

"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.

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).

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.

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.

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'.

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).

Google has a lock on the (incredibly profitable) search advertising market. For Yahoo to match that they would have to increase their search market share (as well as improve their monetization of it).

That's a much harder problem than matching Yahoo's revenue. As far as I know, most of Yahoo's advertising revenue is display based, and the money made from that is basically a factor of page views.

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

Converts what? Sales? If that's the case then it doesn't surprise me (search advertising is incredibly efficient). But what you might find surprising is that I find you can get Facebook advertising for less than 1/15th of the price of the equivalent Google ad (by choosing CPM instead of CPC ads).

They aren't mature because they are taking external funding rather than funding growth from profits.

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.

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-...

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.

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.

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

Oooh... are you being ironic?

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?

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.

Assuming no growth; risk free + equity risk premium = 8% + company lasts infinitely (or for a long time): 3551e6/.75/.08 = 5.9110e9, 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.

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

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

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

Still undervalued. Goldman got a good deal.

Well tried, Goldman!

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

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.

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.

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.

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.

"Google's P/E is ridiculous" - really?

Google's P/E is around 25 which I think is reasonable for a company that a) has been growing earnings on average 20% per year for the last 3 years; and b) Is sitting on a big pile of cash worth about 15% of its market value.

(Disclosure: I own google shares)

Why are 300 million Americans a more valuable advertising market than 300 million Europeans?

Because those 300 million Americans shop at the same place, and, generally speaking, speak the same language. If I run a department store in England, advertising in France doesn't do me much good. Ukranian universities don't much care about advertising in Spain.

The US is the largest, richest single market in the world, with the possible exception of China/India. Those markets, however, are undeveloped.

Yeah, if they signed up everyone on earth they could get it down to a respectable 10.

Come on, that's not fair. They only started playing with monetization strategies a few years ago. Not only that but they are the de facto standard of social media online. That's a pretty big asset that can be monetized in lots of creative ways.

Myspace was the de facto standard in 2005. Napster was the de facto standard for filesharing in 98.

Facebook is quickly becoming the next Myspace. By leveraging it as a platform, they're ceding control on UX. People left Myspace because most pages were ugly and blared shitty music at you. I can't count how many "friends" I've removed for sending farmville and mobwars invitations, or having astrology crap automatically posted to my news feed, or, or, or...

Facebook is facing a position where monetization means shrinking its social graph, which isn't particularly enviable for the King of Social.

I guess what I was trying to say is that there's room for revenue growth, not that there's no chance they'll tank.

I agree with you, targeting on facebook is very poor right now. I can target those who has liked a certain page, while I would like to be able to target anyone who is a member of any group with my keyword in title, etc. new facebook redesign encourages people to add more information that matters (like employers, languages you speak, etc. not what music you like and movies you watch) about them which will enable even better targeting. advertisers will love this for higher conversion rate and users will love it(and less ignore ads) because they will see more relevant ads that are interesting to them.

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.

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.

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.

or maybe, everyone is going to be worth $10 in a long run. 2bn users * $10, they have already made their money. And its a cheap assumption.

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