The researchers found that the revenue of the average company going public between 1996 and 2010 grew by 212% over the five years after its IPO.
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.
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.
Yes and no... considering FB's incredibly massive eyes on page, today, which might not last... they've been pretty bad about monetizing and they've had about 6 years of knowing they were huge to do it. That's not a great track record (as far as making big returns)
Reading Peter Thiel's lecture notes and I think it is the sixth one that goes into great detail about the returns of new companies following a power law. Hence, the average is mindbendingly irrelevant.
I am certainly not buying into facebook, but not due to this analysis.
> FB may be many things but average is certainly not one of them.
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%:
FB is a much larger company than the average IPO. Larger companies often grow slower as they dominate their markets. With 900 million users, it would seem that the developed countries are fairly saturated and won't see much growth in the user base.
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.
Agreed. I read this and said "You are looking back to 1996? Seriously?" Now I am sure that the market will figure out what to do with the company but I sure as heck don't see these guys shorting a few hundred million shares.
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.
Wow. That's so insightful, I think you've single-handedly rendered every research division at every investment bank obsolete. Consider switching careers.
"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."
A quick collapse of the price would be best for everyone, except for the "muppets" who bought FB shares in the IPO. Especially for Facebook, who would otherwise see an exodus of employees who can make more in terms of vesting credit at companies whose share price does go up. I do think a market cap of >$50 billion is sustainable based on the size of the warchests at Microsoft and Apple. If they could only ever buy one company, it would be Facebook.
Ive never seen so many bearish articles about a company before. That's probably a good sign if you are bullish on FB... Here in Sweden we have brokers who market how to short FB big-time!
Based on what? Based on the fact that FB IPO'd at 38 so 14 suddenly seems cheap? Are you simply looking at price or other things also, like outstanding stocks, revenue, future potential etc. or just a single number "14".
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.
That's pretty ballsy, I'd suggest you keep a little reserve, just in case. Staggered buy-in is a good way to hedge your bets if you are going to buy only one company.
The author is assuming that stock performance is inherently linked to internal company metrics, which is simply a naive assumption. P/E ratio is not the holy grail of valuating companies, there are countless other stocks other than GOOG who have been growing for years despite having a huge P/E ratio.
Maybe they should charge users fees to protect their privacy rather than focus on charging advertisers? 10 dollars a year to not sell your data to advertisers. 20 dollars a year to not allow law enforcement to view your data without a court order signed by a judge, etc.
There have been so many articles speculating on the true value of Facebook shares. The truth of the matter is that the market sets the value - and it's just adjusting Facebook's, and other people's expectations at the moment. $13.80 is pretty good value for a share - it gives plenty of space for bumps upwards in the market (key sales, acquisitions and appointments).
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.
Of course, this is all based on current information of revenue... but people don't pay for current business, they pay for potential of business (research), and FB seems to have some decent research.
Key fallacy in the argument: Revenue growth is compared to the average IPO.
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.
So if we apply industry standard valuation techniques, tested against an existing listed tech company Facebook is valued at $13.80. Why did everyone buy it at more than double the price? Ouch.
Now this is just silly. Stock prices are a bet. Sometimes they are more of a sure bet, sometimes they are more of a risk. But the idea that anyone can know exactly what a stock should be priced at for a company in a very dynamic field like facebook is just silly. It's better to point out that facebook's current valuation seems quite high and the risk of investing in facebook right now also seems quite high. But beyond that there are no certainties. Facebook could end up with a trillion dollars a year in net revenue in 10 years, or it could go end up sold to a 3rd party company for a tiny fraction of it's current market cap. We don't know and nobody can know.
You really think companies investing billions in things like Facebook are just throwing money at whatever they fancy and hoping it all works out? Investment banks employ thousands of people who do nothing but sit in their office and calculate if a certain security's price is off by fractions of a percent. Virtually everything that bank does is based on that analysis. They are very well-paid and a good market researcher is worth 100x his weight in gold-pressed latinum. They do fuck up, often publicly as it turns out, but that does not make their science any less refined.
Facebook was pushing really, really hard for a higher IPO. Why? Why would the company WANT to sell off at 50, 100, or 150 price per earnings, higher and higher? This is setting unrealistic expectations and setting themselves up for failure. Does anyone know?
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...
An IPO is firstly here to make money for the company. FB masterly made the maximum money they could, they sold as high as possible. It was a perfect IPO for FB. Nothing more.
From Facebook's perspective, they are at the end of a golden period where they are being judged by their potential rather than their results. That is a powerful thing, and probably the reason they overreached. Eventually, people will decide that 25x sales is insane, and they just won't be worth as much.
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.
I think this analysis ignores the marketing potential of facebook's user data. No one has even scratched the surface of targeted marketing with such data. An obvious thing to try would be to tailor the presenter of a product based on the personalities the user seems to defer to in facebook conversations. But I haven't bought any FB stock, I just think the analysis is facile and the real picture is much murkier.
Odd that a lot of people think that "No one has even scratched the surface of targeted marketing" for years and years on while no great improvements are made.
It looks more and more like natural intelligence in the 80's. Promised to be just around the corner, but never came.
>"I think this analysis ignores the marketing potential of facebook's user data."
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.
I don't get the negativity towards FB that seems to be an undercurrent in these threads. This is Hacker News. If FB IPO'ed too high, that's good for the hackers. That means they got more money to build the business. If some investors lose a lot of money in the process, who cares?
[+] [-] cageface|14 years ago|reply
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.
[+] [-] tokenadult|14 years ago|reply
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.
[+] [-] astrofinch|14 years ago|reply
[+] [-] redwood|14 years ago|reply
[+] [-] hessenwolf|14 years ago|reply
I am certainly not buying into facebook, but not due to this analysis.
[+] [-] nandemo|14 years ago|reply
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%:
http://www.simplestockinvesting.com/SP500-historical-real-to...
[+] [-] johncarpinelli|14 years ago|reply
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.
[+] [-] ChuckMcM|14 years ago|reply
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.
[+] [-] onetwothreefour|14 years ago|reply
The end.
[+] [-] bluedanieru|14 years ago|reply
"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."
[+] [-] tybris|14 years ago|reply
[+] [-] SuperChihuahua|14 years ago|reply
[+] [-] vibrunazo|14 years ago|reply
[+] [-] baq|14 years ago|reply
[+] [-] waterlesscloud|14 years ago|reply
[+] [-] yumraj|14 years ago|reply
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.
[+] [-] jacquesm|14 years ago|reply
[+] [-] MichaelApproved|14 years ago|reply
Instea of going all in and buying the stock, consider options.
[+] [-] melvinmt|14 years ago|reply
[+] [-] antr|14 years ago|reply
[+] [-] 16s|14 years ago|reply
[+] [-] BenStroud|14 years ago|reply
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.
[+] [-] duaneb|14 years ago|reply
[+] [-] freshfunk|14 years ago|reply
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.
[+] [-] smackfu|14 years ago|reply
[+] [-] AznHisoka|14 years ago|reply
[+] [-] sparknlaunch12|14 years ago|reply
[+] [-] rjtavares|14 years ago|reply
His price was $28.
[+] [-] powertower|14 years ago|reply
[+] [-] biscuit|14 years ago|reply
[+] [-] InclinedPlane|14 years ago|reply
[+] [-] bluedanieru|14 years ago|reply
[+] [-] its_so_on|14 years ago|reply
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...
[+] [-] Loic|14 years ago|reply
[+] [-] damoncali|14 years ago|reply
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.
[+] [-] vezycash|14 years ago|reply
[+] [-] Estragon|14 years ago|reply
[+] [-] silvestrov|14 years ago|reply
It looks more and more like natural intelligence in the 80's. Promised to be just around the corner, but never came.
[+] [-] tatsuke95|14 years ago|reply
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.
[+] [-] rayiner|14 years ago|reply
[+] [-] tatsuke95|14 years ago|reply
[+] [-] nemesisj|14 years ago|reply
[+] [-] Im_Mr_Manager|14 years ago|reply