Value is more a function of future revenue, and margin, than it is of past revenue. So upward momentum, which Facebook has and Yahoo and EBay do not, explains the higher valuation.
Also, valuation comes from the expectation over all possible outcomes. Perhaps there's a 60% chance Facebook winds up just a $25B company. But there's also a 38% chance that it becomes a $200B Google and a 2% chance it becomes a one-of-a-kind $400B post-Google monopoly. The weighted average of those outcomes is $99B, even though your "$25 Billion company" sense remains the modal/most-likely outcome.
What kind of analysis is that? Valuations aren't based upon some arbitrary assignment of percentages to various outcomes. They're based upon hard numbers. I'm not a Facebook hater, I think their revenue will continue to grow, especially if they are able to successfully expand into new markets (hardware for example). But as for now, seeing as how they have really hit a saturation point in the US market in terms of user base to the point where usage is actually dropping, I have a hard time seeing them as anything close to a $100 billion company.
I would have a very hard time investing in any company whose sole source of income was based upon display ads, and was still trying to figure out a solid revenue model. You can say that they already have one, but if you compare the long-term viability of social ads to Microsoft for example, I think you would agree that the revenues that Microsoft generates are likely to be a lot more stable than those of Facebook. I think that social networks in general are still in their infancy, and anybody who tries to peg a valuation on any of them without some more data is acting rather foolishly. I'd be very curious to know what kind of numbers Twitter is generating.
It's important not to confuse hype with value. What generates the hype is not necessarily something that people are willing to pay for, and at the end of the day that's what determines a business' value.
My question is "Where is that revenue supposed to come from?". Let's assume Facebook's userbase doubles in the next year, and tops out/ holds steady at at 1.5 Billion people for the foreseeable future, and that their revenue per user doubles from $4/year to $8/per year -- there's a reasonable $80 Billion valuation for you, but where to from there? Investors buy stock they think will rise in value. Will FB offer a dividend?
Here is the rub with/for FB: The best ads are no ads-- playing the 'Like' game is cheaper, and more authentic for advertisers. Better than Google's search results your posts are more social, cost nothing, and show up in between pictures and posts by friends.
Smart people with that much attention flowing through their systems will figure out the details: which ad formats, which promotions, which virtual/real goods, which novel payment mechanisms. Or maybe someone outside Facebook will figure it out, but then with Facebook's attentional monopoly, Facebook will make it work best. (See also: Overture vs. AdWords.)
And the 'Like' game isn't a threat to Facebook, it's a trump card. They control which 'Likes' get broadcast into friends' daily activity. You could just as well say of Google SERPS vs. AdWords: "The best ads are no ads -- playing the SEO game is cheaper, and more authentic for advertisers." In fact, getting into the prime attentional real-estate that Facebook's algorithms and policies control will be exactly as expensive as Facebook wants it to be.
"Smart people with that much attention flowing through their systems will figure out the details". As an investor, I'm uninspired here -- the details are all that matter to me-- not who the smartest guy in the room is, not at these prices. Think about Enron, or AOL. I'm not seeing what Facebook makes -- this is all very reminiscent of the 1998-2001 tech boom. I know what Apple makes (consumer electronics and software), and what Microsoft makes (consumer software). I know what Google makes (software to help me find the information I want). I know what AOL sold: dial-up internet access. And Enron: natural gas
What does Facebook make? How will they help businesses make more sales and connections using their ad network? Will people get tired of 'liking' businesses, and having their posts appear next to pictures and posts of friends and family?
I agree completely. The "Like" phenomenon feels very much like something you would see on VH1's "Remember the 80's?" The problems arise when people who enjoy using Facebook immediately assume "PROFIT." I would challenge most people lauding this as the next Google to ask themselves how many ads they've clicked on in the past year on Facebook compared to Google.
I don't have any doubt about Facebook's smarts or ability to implement cool social networking things, but the bottom line is that very little of what they offer anybody would pay for.
> Smart people with that much attention flowing through their systems will figure out the details: which ad formats, which promotions, which virtual/real goods, which novel payment mechanisms.
Wow, you just hand waved over a tonne of details.
You should contact Yahoo to see if you can run it. You just solved the exact problem they have. Lots of attention, can't monitize.
An investor/observer doesn't have to solve a company's problems, or even know all the details of its operations. A company is an abstraction. You can evaluate it based on its team, and its market power/sustainable-advantage. Indeed, we should expect the company management understands many things we outsiders do not – or else they're in the wrong jobs.
With Facebook's attentional domination and network-effects, even idiots would be able to build a $20-30B business. Facebook's management are not idiots. They understand the giant success drivers of Google and others in the network era, as well as the risks from upstarts and changing tastes.
Well, anything's possible, and I'd even say that they might do something else that neither us nor them nor anyone else has figured out yet, but I can't speculate there. I see Facebook as a potential AOL without the dial-up service, but with more user loyalty, and a potentially unbreakable monopoly on IM. If they can focus on what they doing best -- helping people stay connected with their friends, and not get lost in the hype of dollar valuations they'll be fine.
As an investor, I'm short Facebook at an $80 Billion valuation.
Possible, but improbable. Google is not resting on their laurels. And there are already excellent mobile search engines like http://www.doat.com/ - and though it is excellent, it hasn't yet made a difference.
I don't have good data on this but a lot of the Facebook ads I myself see are just linking to brand pages on Facebook itself. So the Like game is not free for advertisers, just like SEO is not free, only more so.
Well, there's no pay-per like option right now, so technically I'd say that this doesn't count.
As to your point re: linking to brand page on Facebook, I feel as if this goes to the point that unless and until you let businesses sell on Facebook, and somehow capitalize on that (through a commission fee, or just more ad revenue for clicks to their Facebook store,) I'm not convinced that either Facebook or these businesses are really better off in the long run.
Don't get me wrong, it pays for businesses to have some kind of a Facebook strategy, unless and until Facebook goes the way of AOL. I agree, the Like game isn't free, but I question its long-term sustainability -- do I really want Doritos' posts next to ones from friends and family?
Frankly, I'd rather just see Reddit or Google style ads that look like, and function like the content I came to see in the first place (and as an advertiser I'd pay well for them, but I find Facebook's current ad set-up to be lacking -- as someone who has spent a considerable amount of my own money on Facebook ads).
OK, so if you replace his 38% chance of $200B with 28%, the valuation is still $79B. I think the qualitative point about upside potential stands, unless you find it completely unlikely that they will succeed big.
Based on similar fates of previous social networks / instant messengers de jour. Every few years a new generation of users grew bored with one beehive and collectively left it for a new one. IRC/ICQ/AIM/YIM/MSN/Friendster/MySpace couldnt avoid this fate even everybody thought they could. No evidence points out that FB will be able to avoid people getting bored with it after x years.
Comments
Value is more a function of future revenue, and margin, than it is of past revenue. So upward momentum, which Facebook has and Yahoo and EBay do not, explains the higher valuation.
Also, valuation comes from the expectation over all possible outcomes. Perhaps there's a 60% chance Facebook winds up just a $25B company. But there's also a 38% chance that it becomes a $200B Google and a 2% chance it becomes a one-of-a-kind $400B post-Google monopoly. The weighted average of those outcomes is $99B, even though your "$25 Billion company" sense remains the modal/most-likely outcome.
What kind of analysis is that? Valuations aren't based upon some arbitrary assignment of percentages to various outcomes. They're based upon hard numbers. I'm not a Facebook hater, I think their revenue will continue to grow, especially if they are able to successfully expand into new markets (hardware for example). But as for now, seeing as how they have really hit a saturation point in the US market in terms of user base to the point where usage is actually dropping, I have a hard time seeing them as anything close to a $100 billion company.
I would have a very hard time investing in any company whose sole source of income was based upon display ads, and was still trying to figure out a solid revenue model. You can say that they already have one, but if you compare the long-term viability of social ads to Microsoft for example, I think you would agree that the revenues that Microsoft generates are likely to be a lot more stable than those of Facebook. I think that social networks in general are still in their infancy, and anybody who tries to peg a valuation on any of them without some more data is acting rather foolishly. I'd be very curious to know what kind of numbers Twitter is generating.
It's important not to confuse hype with value. What generates the hype is not necessarily something that people are willing to pay for, and at the end of the day that's what determines a business' value.
My question is "Where is that revenue supposed to come from?". Let's assume Facebook's userbase doubles in the next year, and tops out/ holds steady at at 1.5 Billion people for the foreseeable future, and that their revenue per user doubles from $4/year to $8/per year -- there's a reasonable $80 Billion valuation for you, but where to from there? Investors buy stock they think will rise in value. Will FB offer a dividend?
Here is the rub with/for FB: The best ads are no ads-- playing the 'Like' game is cheaper, and more authentic for advertisers. Better than Google's search results your posts are more social, cost nothing, and show up in between pictures and posts by friends.
"Where is that revenue supposed to come from?"
Smart people with that much attention flowing through their systems will figure out the details: which ad formats, which promotions, which virtual/real goods, which novel payment mechanisms. Or maybe someone outside Facebook will figure it out, but then with Facebook's attentional monopoly, Facebook will make it work best. (See also: Overture vs. AdWords.)
And the 'Like' game isn't a threat to Facebook, it's a trump card. They control which 'Likes' get broadcast into friends' daily activity. You could just as well say of Google SERPS vs. AdWords: "The best ads are no ads -- playing the SEO game is cheaper, and more authentic for advertisers." In fact, getting into the prime attentional real-estate that Facebook's algorithms and policies control will be exactly as expensive as Facebook wants it to be.
"Smart people with that much attention flowing through their systems will figure out the details". As an investor, I'm uninspired here -- the details are all that matter to me-- not who the smartest guy in the room is, not at these prices. Think about Enron, or AOL. I'm not seeing what Facebook makes -- this is all very reminiscent of the 1998-2001 tech boom. I know what Apple makes (consumer electronics and software), and what Microsoft makes (consumer software). I know what Google makes (software to help me find the information I want). I know what AOL sold: dial-up internet access. And Enron: natural gas
What does Facebook make? How will they help businesses make more sales and connections using their ad network? Will people get tired of 'liking' businesses, and having their posts appear next to pictures and posts of friends and family?
I agree completely. The "Like" phenomenon feels very much like something you would see on VH1's "Remember the 80's?" The problems arise when people who enjoy using Facebook immediately assume "PROFIT." I would challenge most people lauding this as the next Google to ask themselves how many ads they've clicked on in the past year on Facebook compared to Google.
I don't have any doubt about Facebook's smarts or ability to implement cool social networking things, but the bottom line is that very little of what they offer anybody would pay for.
"I agree completely. The "Like" phenomenon feels very much like something you would see on VH1's "Remember the 80's?"
Wow. Harsh, but spot-on.
> Smart people with that much attention flowing through their systems will figure out the details: which ad formats, which promotions, which virtual/real goods, which novel payment mechanisms.
Wow, you just hand waved over a tonne of details.
You should contact Yahoo to see if you can run it. You just solved the exact problem they have. Lots of attention, can't monitize.
An investor/observer doesn't have to solve a company's problems, or even know all the details of its operations. A company is an abstraction. You can evaluate it based on its team, and its market power/sustainable-advantage. Indeed, we should expect the company management understands many things we outsiders do not – or else they're in the wrong jobs.
With Facebook's attentional domination and network-effects, even idiots would be able to build a $20-30B business. Facebook's management are not idiots. They understand the giant success drivers of Google and others in the network era, as well as the risks from upstarts and changing tastes.
Where is that revenue supposed to come from?
It may be possible they create a good mobile search engine and eat Google's snack.
Well, anything's possible, and I'd even say that they might do something else that neither us nor them nor anyone else has figured out yet, but I can't speculate there. I see Facebook as a potential AOL without the dial-up service, but with more user loyalty, and a potentially unbreakable monopoly on IM. If they can focus on what they doing best -- helping people stay connected with their friends, and not get lost in the hype of dollar valuations they'll be fine.
As an investor, I'm short Facebook at an $80 Billion valuation.
Possible, but improbable. Google is not resting on their laurels. And there are already excellent mobile search engines like http://www.doat.com/ - and though it is excellent, it hasn't yet made a difference.
It may also be possible they may be able to get more revenue per user. Even a $0.01 increase in revenue per user is substancial given their numbers.
Even at 1 Billion users, that's only $10 Million -- less than 1% of what they made in the last 6 mos.
I don't have good data on this but a lot of the Facebook ads I myself see are just linking to brand pages on Facebook itself. So the Like game is not free for advertisers, just like SEO is not free, only more so.
Well, there's no pay-per like option right now, so technically I'd say that this doesn't count.
As to your point re: linking to brand page on Facebook, I feel as if this goes to the point that unless and until you let businesses sell on Facebook, and somehow capitalize on that (through a commission fee, or just more ad revenue for clicks to their Facebook store,) I'm not convinced that either Facebook or these businesses are really better off in the long run.
Don't get me wrong, it pays for businesses to have some kind of a Facebook strategy, unless and until Facebook goes the way of AOL. I agree, the Like game isn't free, but I question its long-term sustainability -- do I really want Doritos' posts next to ones from friends and family?
Frankly, I'd rather just see Reddit or Google style ads that look like, and function like the content I came to see in the first place (and as an advertiser I'd pay well for them, but I find Facebook's current ad set-up to be lacking -- as someone who has spent a considerable amount of my own money on Facebook ads).
You seem to be missing the 10% or so chance that Facebook is obsolete in 5 years time.
OK, so if you replace his 38% chance of $200B with 28%, the valuation is still $79B. I think the qualitative point about upside potential stands, unless you find it completely unlikely that they will succeed big.
How do you calculate that chance?
Based on similar fates of previous social networks / instant messengers de jour. Every few years a new generation of users grew bored with one beehive and collectively left it for a new one. IRC/ICQ/AIM/YIM/MSN/Friendster/MySpace couldnt avoid this fate even everybody thought they could. No evidence points out that FB will be able to avoid people getting bored with it after x years.