I bet it won't fall that low. $4 would be valuing the company at about 10x their 2011 income of $1B, which is extremely low for a company expected to grow. I wouldn't expect to see a valuation under 20x, or about $7-8 per share. My guess is ~$10 per share is the floor on this one.
Is Facebook really expected to grow that much? Even counting the 13% or so fake accounts, they have around 800 million active accounts.
That's a bit over 10% of the world's population. They can't really get the growth that's expected with their P/E, especially because of the difficulties that they're having with getting higher returns/user. They can't grow their userbase by that much either.
What keeps the stock up is the idea that one day they may do something other than ads, and sell something to their user base.
I don't know if there is an example of a public internet company that was able to transition from being an ad-base business into selling stuff. The closest may be LinkedIn, who's selling recruiter tools and premium memberships. However, LinkedIn had been doing that before the IPO, as a relatively small company.
I'm skeptical that Facebook can pull this off in a reasonable time frame, but shareholders who are psychologically anchored to the IPO price are probably more optimistic.
What keeps the stock up is the idea that one day they may do something other than ads, and sell something to their user base.
Which sounds remarkably similar to the way people thought about companies during the dotcom boom: Get the users first, figure out how to make money off of them later. Facebook's admittedly got one key difference from companies during the dotcom heyday, which is that instead of a burn rate it has this thing called 'revenue'. But that aside, at least for a while investors seemed to have fallen back into the old trap of thinking that the monetary value of a user isn't somehow tied to the amount of income they provide.
Maybe Facebook will figure out something else. . . but if nobody's sure what that is right now then it's still an Underpants Gnomes[1] business model.
FB can grow either by increasing it user base as you suggest, or by monetizing it's users better. So if it say increases usage by 5x and monetization by 5x you are looking at a 25x multiplier. Will this happen, I have no idea.
Unfortunately for Facebook, this is fighting a few trends. users numbers have gone down in the US and Britain [1] and mobile usage is going up [2], and Facebook is having a much harder time monetizing mobile over the web.
I agree with your general premise however, that Facebook's primary growth won't be on the user base, but needs to be on the revenue per subscriber numbers. This is going to really test one of the Valley's most recent premises, that building a massive user base will also create a massive business (Twitter, Instagram I'm looking at you...)
i'm still waiting for the famous growth numbers to be made public. everyone talks about growth, but FB has not made estimates/target numbers available.
Very true. Some large tech companies now still have pretty horrendous stocks. Microsoft has been flat for like a decade and it's still an industry leader which is counterintuative to people who don't know that much about the market.
I'm sure he meant that they could, in theory, utilize their brilliance towards kickstarting something business oriented to reverse the sentiment. For whatever reason though, Mark seems more interested in Frank Gehry's NASA hanger than actually making money. It's a big fucking revelation to him that people in finance actually care about financials. Who knew?
The whole situation really makes me think how much the current funding model as just a glorified legal ponzi scheme: More users, more funding, more users, more funding, IPO & profit.
I'd say most of the better business minds were the investors and the prudent ones have already sold. I'm convinced Eduardo Saverin is really the genius of the entire group. He sold shares right before the IPO, renounced his US citizenship, and moved to Singapore. He may have been screwed over by Facebook before but he gets the last laugh now that he sold his shares for double what their worth and got to avoid some taxes while doing it :)
In contrast, Mark choose to be more of a Sean Parker - a great creator of free products and, thus far, a fairly lousy businessperson. Companies like Spotify are amazing for users yet that doesn't stop them from losing millions each month in licensing. These companies dig themselves into holes from the very beginning and simply pray the financial problem fixes itself. My opinion and seemingly that of investors is that there is no indication that it will until the model itself is changed. Recent IPOs all tell the same story: that businesses not built with long term viable business models have trouble performing well on the market. Until "free" can work like Google enables it to in more companies, nobody is willing to bet on the hole not getting deeper without the likelihood of a larger round to keep these failing companies afloat.
Comments
I plan to buy it if it falls to 4 dollars or less.
I bet it won't fall that low. $4 would be valuing the company at about 10x their 2011 income of $1B, which is extremely low for a company expected to grow. I wouldn't expect to see a valuation under 20x, or about $7-8 per share. My guess is ~$10 per share is the floor on this one.
http://www.forbes.com/sites/tomiogeron/2012/02/01/facebooks-...
Is Facebook really expected to grow that much? Even counting the 13% or so fake accounts, they have around 800 million active accounts.
That's a bit over 10% of the world's population. They can't really get the growth that's expected with their P/E, especially because of the difficulties that they're having with getting higher returns/user. They can't grow their userbase by that much either.
What keeps the stock up is the idea that one day they may do something other than ads, and sell something to their user base.
I don't know if there is an example of a public internet company that was able to transition from being an ad-base business into selling stuff. The closest may be LinkedIn, who's selling recruiter tools and premium memberships. However, LinkedIn had been doing that before the IPO, as a relatively small company.
I'm skeptical that Facebook can pull this off in a reasonable time frame, but shareholders who are psychologically anchored to the IPO price are probably more optimistic.
What keeps the stock up is the idea that one day they may do something other than ads, and sell something to their user base.
Which sounds remarkably similar to the way people thought about companies during the dotcom boom: Get the users first, figure out how to make money off of them later. Facebook's admittedly got one key difference from companies during the dotcom heyday, which is that instead of a burn rate it has this thing called 'revenue'. But that aside, at least for a while investors seemed to have fallen back into the old trap of thinking that the monetary value of a user isn't somehow tied to the amount of income they provide.
Maybe Facebook will figure out something else. . . but if nobody's sure what that is right now then it's still an Underpants Gnomes[1] business model.
[1]: http://en.wikipedia.org/wiki/Gnomes_(South_Park)
FB can grow either by increasing it user base as you suggest, or by monetizing it's users better. So if it say increases usage by 5x and monetization by 5x you are looking at a 25x multiplier. Will this happen, I have no idea.
Unfortunately for Facebook, this is fighting a few trends. users numbers have gone down in the US and Britain [1] and mobile usage is going up [2], and Facebook is having a much harder time monetizing mobile over the web.
I agree with your general premise however, that Facebook's primary growth won't be on the user base, but needs to be on the revenue per subscriber numbers. This is going to really test one of the Valley's most recent premises, that building a massive user base will also create a massive business (Twitter, Instagram I'm looking at you...)
[1] http://www.telegraph.co.uk/technology/facebook/8573340/Faceb...
[2] http://www.forbes.com/sites/ericsavitz/2012/05/09/facebook-t...
We actually have (at last public announcement) 955 million monthly active users.
"expected to grow"
i'm still waiting for the famous growth numbers to be made public. everyone talks about growth, but FB has not made estimates/target numbers available.
I originally said the same at at $10, which it's on track to hit. Sentiment is making me reconsider...
It may bounce back or firm-up. Hard to say. They have a lot of great minds.
great minds != great stock
Bell Labs had great minds, but that didn't mean that the legal entity managed their innovations well ...
Very true. Some large tech companies now still have pretty horrendous stocks. Microsoft has been flat for like a decade and it's still an industry leader which is counterintuative to people who don't know that much about the market.
I'm sure he meant that they could, in theory, utilize their brilliance towards kickstarting something business oriented to reverse the sentiment. For whatever reason though, Mark seems more interested in Frank Gehry's NASA hanger than actually making money. It's a big fucking revelation to him that people in finance actually care about financials. Who knew?
The whole situation really makes me think how much the current funding model as just a glorified legal ponzi scheme: More users, more funding, more users, more funding, IPO & profit.
I'd say most of the better business minds were the investors and the prudent ones have already sold. I'm convinced Eduardo Saverin is really the genius of the entire group. He sold shares right before the IPO, renounced his US citizenship, and moved to Singapore. He may have been screwed over by Facebook before but he gets the last laugh now that he sold his shares for double what their worth and got to avoid some taxes while doing it :)
In contrast, Mark choose to be more of a Sean Parker - a great creator of free products and, thus far, a fairly lousy businessperson. Companies like Spotify are amazing for users yet that doesn't stop them from losing millions each month in licensing. These companies dig themselves into holes from the very beginning and simply pray the financial problem fixes itself. My opinion and seemingly that of investors is that there is no indication that it will until the model itself is changed. Recent IPOs all tell the same story: that businesses not built with long term viable business models have trouble performing well on the market. Until "free" can work like Google enables it to in more companies, nobody is willing to bet on the hole not getting deeper without the likelihood of a larger round to keep these failing companies afloat.