Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80.
I'm as bearish as anybody on FB but this seems like extremely lazy analysis. FB may be many things but average is certainly not one of them.
Several of the other comments you have received relate to this idea, so please allow me to ask a specific question (directed both to you and to onlookers). What is not average about Facebook? For some commenting here, the specific question I have is what is above average about Facebook, related to its revenue, to suggest it will overperform the average of historic experience of companies that have IPOed? As an investor, interested in a non-lazy analysis, what should I look for to decide whether or not Facebook is a good investment at the current price of its stock? I note that you wrote,
I'm as bearish as anybody on FB but this seems like extremely lazy analysis.
so I'm not specifically asking you for a rationale for buying Facebook. Other comments at this comment level or below imply that there may be a rationale (perhaps unconvincing to you, but perhaps convincing to some onlooker) for buying Facebook's stock at today's price. What rationale is that? If I had some extra money, would I be well advised to invest it in Facebook stock? Why or why not?
I'd appreciate hearing from anyone who has an analysis that goes deeper than the news headlines of the last week since the Facebook IPO. Thanks.
But I say that because I think FB's style of social networking is a fad, not because I believe crude aggregate statistics of internet companies in general tell us something useful in FB's case.
Facebook's advantage? They have a virtual monopoly on this utility. Not only that, switching costs are high (unlike email and search).
Look at the kind of growth apps gets from integrating with Facebook (Instagram, Viddy, Spotify). All social apps going forward will only reinforce their position by integrating with them.
Some think it'll never come. But it's a factor.
The article uses US IPOs 1996-2010 as the initial sample. I'd like to know how sensitive this is to expanding or narrowing that range. How does that average change if you adjust the range? (The academic article may have some note of this.)
Then, the article makes comparison to Google's current price-to-sales ratio as a benchmark (5.51-1). The analytic justification is nothing more than "[s]ince Facebook FB -0.64% is most often compared to Google GOOG -0.66%..."
Some questions I'd ask about this:
- What did Google's P/S ratio look like at IPO, and what was its growth?
- What does Facebook's P/S ratio look like compared a broader sample of tech companies' P/S ratios? Or including non-tech companies?
- Why not use price-to-earnings ratio? (I'm not a finance guy, but the subtle difference in wording here gives me pause to at least investigate the question.)
So what you're hearing me say is: we need sensitivity analysis. The assumed benchmarks appear arbitrary enough that we have to see how the results change when you adjust the inputs.
Lastly, there's the age-old fundamentals versus intangibles question: investors make their decisions based on both. The fundamental analysis (of earnings, etc., like the article does) is not deterministic: it just gives you context. Intangibles (faith in management, broader understanding of how the market will shift and affect the firm's competitive position) matter, too. They're just, well, intangible.
But also included under the umbrella of intangibles is how investor sentiment toward the company may change. If people think FB is going to make some huge announcements in the next year that will send the share price skyrocketing for a short (but not sustainable) high watermark, then that potential short-term return is worth buying.
[Edit 5/25 6:57a PT - changed range from 96-00 to 96-10 based on correction. Thanks!]
1) Current P/E is 74 (Google IPOed at 132 and was proven to be undervalued).
2) Facebook has higher revenues than Google did at IPO.
3) Facebook has more users, and more engaged users than Google did at IPO (though there is some question as to whether or not FB can continue to grow users).
Yes, they have to figure out the "facebook way" of delivering ads, but if they do...
They left negative money on the table at the table at the IPO. Good for them, and probably good for their long-term prospects (big buffer), but from a retail investor perspective, the business has a lot of catching up to do to meet the market.
I actually agree with the $10-15 conclusion right now, but the business has a chance to make up some of that gap before the share price goes there. Probably.
(not invested, and happily so)
Mar 31, 2011: $94MM
Mar 31, 2012: $186MM
Obviously it's only two data points but payment revenue has grown 100%. Payments revenue only represents 10% of their total revenues.
WRT to this, the question becomes whether they could ramp up payments. I'm guessing that their main driver for payments revenue is games.
They recently launched offers. That could potentially drive revenue.
I think that Facebook should take on Square and enter the payments market. They're in a unique position to create Facebook Wallet.
The biggest barriers I see from this is that Zuckerberg would have to drive this kind of strategy and it doesn't seem like a move he'd take.
1. FB doesn't behave like the sample mean
2. FB doesn't behave like the sample
1 does not mean 2. In fact, without any statistics of dispersion (which the Kauffman paper doesn't provide) we cannot rule on 2 whatsoever.
B. We're not in a bubble
A. You're saying things people also say when we're in a bubble, so we're in a bubble
B. I'm saying things people also say when we're not in a bubble
B. You, on the other hand, are saying the exact things people say when we're not in a bubble
A. I'm saying things that those that are right also say when we are in a bubble
B. Well, I'm saying things that those that are right also say when we "are not" in a bubble.
It's all standard talk, both your comment and what you're responding to and it all gets said both inside and outside of bubbles. What 'is being said' is never an argument. Everything is always 'being said'.
You would have said the same thing about Google and Amazon last time around. For some reason, they were different. Don't make predictions if you don't have an outstanding track record to back them up. Otherwise, nobody has any reason to believe you.
In general I think that an average just isn't a very useful statistic. It throws away way too much information.
I am certainly not buying into facebook, but not due to this analysis.
the mean of a power law of this form is more skewed by the few companies returning a lot than it is by the majority. assuming that more than 50% of the companies return a little, the median would be irrelevant, but the mean is very sensitive to outliers.
it comes down to what kind of loss you incur for making an incorrect prediction. for mean, it's a squared loss (which penalizes you for being wrong in the tails more heavily) but for a median it's the absolute loss.
the argument being made was that fb is an outlier and (as I read it) the mean didn't reflect it, so the maths was "lazy" as it didn't take that into account. actually the mean does take these outliers into account (since it's corresponding loss function penalizes you harshly for being wrong in the tails) and so is probably not too unreasonable at predicting on outlier companies (certainly better than the median).
As an aside, those notes are an incredible way of thinking about the world differently. I've gotten a lot out of it.
It's an obvious point when you think about it. This is survivorship bias: many new companies fail (with a return of ~zero) before becoming a part of the IPO sample.
Do you mean the assumption of 212% growth over 5 years is lowish? If so, I agree.
As for the average return: the author is fixing a price at T+5years, so if you assume a higher-than-average expected return for Facebook, then its current stock price should be even lower.
Also note that even as a back-of-envelope estimate, his analysis is flawed because the 212% figure was calculated by comparing revenues adjusted for inflation, while the 11% figure is for non-adjusted total return. The corresponding real (inflation-adjusted) average return is 7%:
The truth is, the stock market, given a long enough timespan, barely beats inflation.
So, 1.9% above inflation plus 2% dividend yield, plus 2.3% current CPI, plus 2.7% "shadow CPI" (the number is from that article you posted) you get a 9% return. That means that facebook should be worth more, not less (since you are discounting at a lower rate).
I want to believe that.
I would be interested to see some projections for FB costs over the next five years. They no longer have the lure of pre-IPO equity to attract new employees. They might have to pay higher salaries instead. Many insiders will be cashing out in the coming months and moving on, so I would guess that FB salary costs are going to climb significantly.
But there is a lot of challenges in wrapping your head around the economics here as well. This is why a lot of people don't understand Google's profitability either.
 http://bear.warrington.ufl.edu/ritter/post_ipo_report_052220... (page 9, Panel C)
"This company is trading at this price, which is appropriate because this price is what the company is trading at. My recommendation is to purchase shares in this company then sell them at a higher price later on. Alternately, we can short this company's stock, and then profit when the price falls."
The GP's comment reminds me of the famous Bill Parcells quote: "You are what your record says you are".
If I purchase stock in a company one week at $33/share, and the next week that same stock is trading at $23/share, it is highly unlikely that the stock was worth what I paid for it, unless something unforeseeable happened to that company during that week which dropped its value by nearly a third. Market capitalization is only an estimate of real value. The only reason the stock market tends to do such a good job of estimating it, is that so many people are doing their homework before deciding to purchase a share.
Articles like this and discussions like this are critical to a healthy market. They help people decide if they should buy or not, and so they promote market efficiency and accuracy.
Apple went public in 1980 at ~100x earnings and is up over 15,000% since then.
I'm not saying that Facebook is Google or Apple, but there's a lot more to analyzing a company than looking at P/E and calling it a day.
What if FB has twice the number of outstanding stocks, so todays 38 would have been effectively 19, would you still have done what you're saying.
This is the fundamental problem with a lot of folks, they just look at the price, and why stocks normally go up when split, it "looks" cheaper but nothing has changed.
Instea of going all in and buying the stock, consider options.
Naturally, if there was some new information available about the company fundamentals that caused FB stock to drop to $14, it would only be a good buy if you could determine that the market overreacted.
The only way to go after an IPO like Facebook's is down. Look at the way the UK market contracted after Lastminute.com's IPO. These are more mature digital times, but there are still lessons to be taken from it.
If anything, Facebook is not the average company. It's not the average company that's gone public either.
That's not to say they won't have challenges growing revenue. I think that a company that's been around this long should've figured out how to mint money by now. But I think this analysis is wrong.
His price was $28.
science? I wouldn't call it that...
I have one theory: they need the money. Perhaps Facebook has some really audacious plans that it is confident in, and simply needs that many bilion dollars to do it (and even more).
From their execution on their audatious plans to date, this would be not be out of character, nor would I completely lack faith in their ability to do so. Any other ideas?
I mean, at the end of the day, wouldn't you rather have a billion in the bank after IPO-ing at 25 price per earnings and ending up fizzling, than have 3 billion in the bank after pushing really, really hard to IPO at 75 price per earnings and ending up fizzling? Personally, 1 billion is the same as 3 billion to me, but the latter scenario is not very pleasant, including plenty of possible lawsuits, etc. It's a lot easier to fault and deride a company in the latter scenario if it doesn't quite live up to expectations...
By contrast, the amount FB actually raised, which is considerably less than that, they're acting like they need or have good use for.
This is just a theory, of course, and perhaps you are right that Facebook would have been HAPPY to raise a hundred billion dollars it has no use for. (Perhaps as part of stock dumping by big shareholders, who don't care what happens after this.) The above is just a guess. But I want to repeat my reason for it, which is that I have been extremely impressed by the expansiveness of Facebook's vision to date, and its execution on it. If they do have something big in mind, it's not unprecedented for them to be able to execute on it; I have some faith in their ability to do so, versus lots of other companies that suddenly realize they can think a lot bigger now that they have all this cash, but have no record of doing so. We'll find out if there's anything like this that Facebook has in mind soon enough...
So the obvious answer is cash. More is better, and they only get one shot at being the unlimited golden boy.
But there are a couple limits to this reasoning. First, you can only use so much cash - Apple, for example, is having some issue with this. I don't think Facebook will have trouble deploying what they raised, though, so this isn't really an issue.
You also want to maintain a good working relationship with Wall St. What happens when Facebook tries to raise another round in the public markets?
And what about current employees? If they watch their shares decline by 50% before they can sell, it's bad for morale.
It looks more and more like natural intelligence in the 80's. Promised to be just around the corner, but never came.
How could the marketing of user data be "ignored" in the analysis? That's all FB is. Without looking at its ability to market user data, FB isn't even a business.