- a goldman unit with a fiduciary duty to clients passed on the deal
- a goldman unit without any such duty is doing the deal
- goldman will make money on the deal at almost any valuation (with the ipo)
- clients need another 20% appreciation to make money (break even at $60B)
As soon as I heard this GS buy-in to Facebook, what came to mind?
Pump and Dump.
We can all see that Facebook's earnings don't justify a $50b valuation any time soon, so to buy in at that valuation looks like a very brave long-term investment. Yet GS have got huge publicity from the deal and, as long as they can sell a good number of their shares, they make money regardless - they win, their investors carry the can.
This whole deal is no better than the spam stock tips I used to get every morning from some unknown address.
Goldman doesn't have to wait for the IPO to make money. According to a separate journal article they are charging their clients 4% and traditionally Facebook would pay 2%-4% on the deal. That comes out to $90M-$120M.
I thought this was going to be a puff piece before I opened it but the most interesting thing--and perhaps this is posted elsewhere and I merely missed it--is it has basic Facebook financials.
$2 billion revenue for $400 million profit gives a P/E ratio of 125. That is simply nuts.
Now I fully realize that the stockmarket is driven on the expectation of future value rather than the simpler view of the ability to produce income, which is why "growth" companies trade much higher than their P/Es but 125? That's like the height of the dot.com era pricing.
Remember at 600 million users, if you exclude those who are illiterate, have no access to computers or the internet, are infirm or simply too young, there's only so much bigger Facebook can actually get (given ~6 billion people on Earth you'd exclude at least half of them).
The counterargument to that is that Facebook has only scratched the surface of monetizing those users and I guess that might be true but I'm also of the opinion that there isn't as much room to monetize as some seem to think.
The usual MO for a VC-backed company is to go all out to build scale. They'll burn through millions of dollars to do it without concern for how to generate money. Why? Because once you have scale many things become easier, even possible.
Facebook has scale and can only generate $400 million in profit a year and only a 20% profit margin? That's less than impressive.
I said the same thing about Amazon in 1999 ("they won't even turn a profit until 2003? How the hell does Wall Street think they're worth $40B when they lose money on each sale?") and ended up with egg on my face for it.
FaceBook's a bit too risky an investment for me now, but I can see how someone who really believed social networking will fundamentally change society and FaceBook is the horse to bet on would go for it.
Mark stated at Startup School that Facebook hasn't posted huge profits (if any) because they continue to invest almost everything back in for as long as they can [1]. Whether that's true or not remains to be seen, but I think it's fair to say that if/when Facebook chooses to turn more of a profit than they are currently, they can/will.
I'm not exactly bullish on Facebook, but you have to admit the upside is completely unknown. No company has ever had so much detailed information about so many people; and thanks to Facebook Connect, Like button, and FBJS in general, they are continuously growing the personalized data they are collecting. There's no telling where all this data could lead. Why would they potentially strangle the golden goose to extract a couple billion today when they are healthily profitable and still agile and innovating on a daily basis?
Personally I think Facebook is and has been playing its hand perfectly, and I think the potential is definitely there for the stratospheric valuation; no one really knows what it will be worth, but it's not too hard to imagine Facebook becoming the most valuable dataset in existence.
Also, now that social-networking sites are driving up demand for humans, is there something we can do to ramp up supply? Perhaps some sort of large-scale human production.
Nice summary. Must take issue with a couple of points.
"$2 billion revenue for $400 million profit gives a P/E ratio of 125. That is simply nuts."
More likely it means that the sum of Facebook's earnings growth and discount rate needs to be about 15 percentage points higher than your favorite comparison point. Is that nuts? Merely debatable I would say.
"Facebook has scale and can only generate $400 million in profit a year and only a 20% profit margin? That's less than impressive."
Most of their investments can be expensed. Not so surprising really.
I'm not a fan of the product or the stock, but I don't believe absurdity is approaching. Much older Google and Amazon have monetized adequately.
$400m is the best case too... No word on what that figure actually is (gross, operating, net). Considering they are still taking lots of investment money, I doubt they are really generating that much free cash.
The only real pivot that I can see being a true revolution is if FB takes on Amazon and starts selling stuff to its users through an internal facebook store apps - and gives FB users a discount to the purchase of said items.
Does anyone remember the story yesterday about the phone that is YouTube only?
Facebook has a massive number of users who check it every day. Humans are social creatures, and looking at pictures of friends, etc., is like cocaine.
The net is moving toward non-neutrality. The biggest impact of this on the typical end user won't be pain from (say) the inability to watch Vimeo videos on their phone, it will eventually be the inability to access key infrastructure services (like Facebook) without sitting through interruption ads.
There won't be any need to worry about privacy b/c Facebook will be able to sell advertisers the right to hijack your computer or phone for 30-60 seconds multiple times each day.
If there's only one social network available on your phone, then you can't just use a different one if the commercials get too annoying. The same applies to search engines... imagine: "While we complete your search, see this message from Johnson and Johnson".
Once this transformation (which now even Google is unabashedly in favor of) happens, major "internet utility" companies will have legitimate Trillion dollar valuations.
The only reason Goldman partners aren't buying is b/c they have safer, higher Yield alternatives.
[+] [-] klochner|15 years ago|reply
[+] [-] eftpotrm|15 years ago|reply
Pump and Dump.
We can all see that Facebook's earnings don't justify a $50b valuation any time soon, so to buy in at that valuation looks like a very brave long-term investment. Yet GS have got huge publicity from the deal and, as long as they can sell a good number of their shares, they make money regardless - they win, their investors carry the can.
This whole deal is no better than the spam stock tips I used to get every morning from some unknown address.
[+] [-] palewery|15 years ago|reply
If the stock goes up after the IPO, GS will take credit for "providing liquidity that was instrumental to FBs success"
[+] [-] trotsky|15 years ago|reply
[+] [-] jdp23|15 years ago|reply
[+] [-] cletus|15 years ago|reply
$2 billion revenue for $400 million profit gives a P/E ratio of 125. That is simply nuts.
Now I fully realize that the stockmarket is driven on the expectation of future value rather than the simpler view of the ability to produce income, which is why "growth" companies trade much higher than their P/Es but 125? That's like the height of the dot.com era pricing.
Remember at 600 million users, if you exclude those who are illiterate, have no access to computers or the internet, are infirm or simply too young, there's only so much bigger Facebook can actually get (given ~6 billion people on Earth you'd exclude at least half of them).
The counterargument to that is that Facebook has only scratched the surface of monetizing those users and I guess that might be true but I'm also of the opinion that there isn't as much room to monetize as some seem to think.
The usual MO for a VC-backed company is to go all out to build scale. They'll burn through millions of dollars to do it without concern for how to generate money. Why? Because once you have scale many things become easier, even possible.
Facebook has scale and can only generate $400 million in profit a year and only a 20% profit margin? That's less than impressive.
[+] [-] nostrademons|15 years ago|reply
FaceBook's a bit too risky an investment for me now, but I can see how someone who really believed social networking will fundamentally change society and FaceBook is the horse to bet on would go for it.
[+] [-] terryjsmith|15 years ago|reply
[1] http://www.justin.tv/startupschool/b/272178321
[+] [-] dasil003|15 years ago|reply
Personally I think Facebook is and has been playing its hand perfectly, and I think the potential is definitely there for the stratospheric valuation; no one really knows what it will be worth, but it's not too hard to imagine Facebook becoming the most valuable dataset in existence.
[+] [-] mahmud|15 years ago|reply
Here is a hint of their plan to remedy that:
http://twitter.com/BigThingist/statuses/22913399742537728
Also, now that social-networking sites are driving up demand for humans, is there something we can do to ramp up supply? Perhaps some sort of large-scale human production.
[+] [-] T_S_|15 years ago|reply
"$2 billion revenue for $400 million profit gives a P/E ratio of 125. That is simply nuts."
More likely it means that the sum of Facebook's earnings growth and discount rate needs to be about 15 percentage points higher than your favorite comparison point. Is that nuts? Merely debatable I would say.
"Facebook has scale and can only generate $400 million in profit a year and only a 20% profit margin? That's less than impressive."
Most of their investments can be expensed. Not so surprising really.
I'm not a fan of the product or the stock, but I don't believe absurdity is approaching. Much older Google and Amazon have monetized adequately.
[+] [-] neworbit|15 years ago|reply
[+] [-] jonknee|15 years ago|reply
[+] [-] phlux|15 years ago|reply
[+] [-] numbchuckskills|15 years ago|reply
[deleted]
[+] [-] grandalf|15 years ago|reply
Facebook has a massive number of users who check it every day. Humans are social creatures, and looking at pictures of friends, etc., is like cocaine.
The net is moving toward non-neutrality. The biggest impact of this on the typical end user won't be pain from (say) the inability to watch Vimeo videos on their phone, it will eventually be the inability to access key infrastructure services (like Facebook) without sitting through interruption ads.
There won't be any need to worry about privacy b/c Facebook will be able to sell advertisers the right to hijack your computer or phone for 30-60 seconds multiple times each day.
If there's only one social network available on your phone, then you can't just use a different one if the commercials get too annoying. The same applies to search engines... imagine: "While we complete your search, see this message from Johnson and Johnson".
Once this transformation (which now even Google is unabashedly in favor of) happens, major "internet utility" companies will have legitimate Trillion dollar valuations.
The only reason Goldman partners aren't buying is b/c they have safer, higher Yield alternatives.
[+] [-] rimantas|15 years ago|reply
[+] [-] chopsueyar|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]