>Companies that make a product that's fun to use, but have never earned a dime from me and probably never will.
> Members: Facebook, Twitter, and Pandora.
Hm, that's not true. Facebook, Twitter, and Pandora probably have made a dime off you if you've been using or posting to them. It's called ads -- and your attention is the product they sell.
Somebody else is paying to convince you to buy something from them. If you aren't buying, they'll eventually figure it out and the whole scheme falls apart.
Advertising has been around for a long time and consumers know how it works. Consumer spending is still a vital part of the food chain.
Right, but what if that attention becomes less valuable as time goes on?
We're already at the point where many people don't even see ads on sites like Facebook. The ads are just background noise.
In five to ten years, the kids born in the mid-90s who have never known life without the internet will start entering the workforce in large numbers. What happens if they're so desensitized to online advertising that they don't even notice it, for the most part? Will companies that derive most of their revenue from easy-to-ignore advertising find that they've hit a wall in terms of being able to derive revenue from the 'attention' of a large number of people?
What was the old troll again, making fun of the way the press was rah-rahing the housing bubble? Oh yeah..
"It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent."
>I love, love, love Pandora. I listen to it nearly every single day over my 3G connection on my iPad. [...] Who is subscribing to ad-free Pandora? You don't even look at the site when you're listening to music. Who cares if there are ads on it?
I think if he really listened to Pandora every day, he would have noticed that there are frequent audio ads between songs.
(1)I think this article is rubbish and (2) I am not qualified for much more than an uneducated opinion. That said:
There might need to be some new categories invented for the purpose of determining appropriate multiples. Technology and software in particular does really have the potential for very high margins and growth that do (often) justify higher valuations than retail/consulting/whatever. But the companies we're talking about are not really comparable to MSFT or Adobe from a valuation perspective.
The fact that writing software is central to all these businesses doesn't mean they are in the same business. These are real businesses making real money. I just don't think they have the same stability.
Technology companies have higher growth potential, but also significantly higher risks (retaining a moat between them and their competitors being one of them), and hence have a significantly higher discount rate, roughly cancelling out the higher growth potential.
>Let's do some simple math here, folks. Assume you bought an entire company that had $100 in revenues and 50% profit margins. And that you paid just two times revenues, or $200. It would still take you four years to break even with revenues holding steady.
The company he describes is in fact a fabulous buy, with a PE of 4. His mistake is to completely discount cash flows past the fourth year. You still own the company after four years, so unless it is set to self destruct, it is worth a lot more than the $200 you paid for it. A non-bubble growth tech company with those margins would typically be worth $1000+.
He's also ignorant of history. Great companies like Google and Microsoft had very high PEs in their early years, which many investors balked at. Those who could stomach the valuations made a mint.
Another way to value companies is to look at comparables that aren't affected by the bubble. For example, Yahoo has been bouncing between 20 and 30 billion -- a valuation that has held up for years. Facebook has similar revenue potential but much better execution and vastly higher growth. Valuing it at 2-3x Yahoo looks reasonable in my book.
He may well be right that some of the companies in the article are overpriced, but he makes a very weak case for his argument.
Was there a correction to the article? Because I see 6 years in the article. Which actually works out to 12% annual return, not that shabby in these return-challenged days.
In his example, the company is profitable from day one. The question is deciding how much those profits are worth -- ie, valuing the company. PE ratios and comparable company valuations are two standard ways to assess the long-term value of a stream of profits.
Adding up the profits until it equals the sum of your investment is an extremely crude measure, because it leaves out what you most care about -- how much the company is worth at the end of the initial time period.
P1. Yes - the company is profitable, but you have to subtract off the price you paid for it in order to find out whether it is profitable from your perspective.
P2.1 P/E is also crude.
P2.2 How much the company is worth at the end of the initial time period is certainly not what I most care about. If it is not viable also as a buy-to-hold, then you are playing greater fool speculation.
P2.3 It gives a useful perspective on the information. Where will Google be in 23.74 years? Will it still be a viable model? Will quantum computing have been proved so I can have a search engine in my pocket? Will all searching have to be social? Will Bing and Facebook become viable alternatives in the next year, driving down Google's margins? Will they ever pay a dividend, or will they keep re-investing until they go bust? My money will be locked up for 23.74 years, and there might be nothing at the end.
Hmm, may be the tools weren't useful for.. just him? Facebook is a life changer for Tunisia. In the start of the revolution, it has served as an alternative news source for more than 1.5 million Tunisians. It served both photos and videos. It's fast and has what it seems to be an infinite bandwidth.
But Facebook is doing much more than that these days. The pages which served the news during the country unrest has now gathered on Facebook and planned anti-government protests virtually, and then in real life. The result was today 100K protesters in my city (of around 700K). The result was also the constitution of a team from different cities that is now leading the strikes.
The current protests may change the government. And if it did, Facebook is doing more than diffusing information: It's building an entire generation. That's because the current protests wouldn't exist if Facebook (or an alternative social network) wasn't there.
For information there are around 1.5 million using Facebook here and the revolution union in Facebook has around the 1 million fans. That is if compared to the USA, that page should have around 200 million fans.
The only danger for Pandora is that the content industry shoos them out. But I don't see that happening. Personally, Pandora is worth the money. (It's too cheap for the use I get out of it.)
That's 250m of net income in the last quarter, more than the 200m generated in the entirety of 2009. In addition, they anticipate 2011 EBITDA of $2b (of course that's different from income, but given that FB has no debt, and depreciation is just the fractional cost of hardware, net income must be above $1.3b in 2011). I personally believe that profits will rise to the $5b annual range within 5 years, which would give it a 12 P/E valuation if it stayed at the current valuation. (But look at Google)
Anyway, I am confident that FB's financials will justify its valuation when the IPO comes along. I don't doubt that Goldman is here to make a killing.
Facebook isn't focused on turning on the money faucet right now. There are so many ways to generate cash that it'll focus on soon.
23 comments
[ 13.0 ms ] story [ 2994 ms ] thread> Members: Facebook, Twitter, and Pandora.
Hm, that's not true. Facebook, Twitter, and Pandora probably have made a dime off you if you've been using or posting to them. It's called ads -- and your attention is the product they sell.
People are so accustomed to thinking of themselves as consumers, that it is difficult for some to fathom that they are often the product.
A general rule of thumb: if you're not paying for it, somebody else is-- and what they are paying for just may be you.
Advertising has been around for a long time and consumers know how it works. Consumer spending is still a vital part of the food chain.
We're already at the point where many people don't even see ads on sites like Facebook. The ads are just background noise.
In five to ten years, the kids born in the mid-90s who have never known life without the internet will start entering the workforce in large numbers. What happens if they're so desensitized to online advertising that they don't even notice it, for the most part? Will companies that derive most of their revenue from easy-to-ignore advertising find that they've hit a wall in terms of being able to derive revenue from the 'attention' of a large number of people?
What was the old troll again, making fun of the way the press was rah-rahing the housing bubble? Oh yeah..
"It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent."
https://secure.wikimedia.org/wikipedia/en/wiki/Australian_pr...
It is mentioned again here:http://www.ft.com/cms/s/0/f2b1a470-cbdf-11df-bd28-00144feab4...
And here is better but more difficult to access: http://www.ft.com/cms/s/0/b5e074f4-cd88-11df-9c82-00144feab4...
And if you really want to learn about it: http://www.google.de/url?sa=t&source=web&cd=1&ve...
I think if he really listened to Pandora every day, he would have noticed that there are frequent audio ads between songs.
oh, it's fortune magazine saying!..
There might need to be some new categories invented for the purpose of determining appropriate multiples. Technology and software in particular does really have the potential for very high margins and growth that do (often) justify higher valuations than retail/consulting/whatever. But the companies we're talking about are not really comparable to MSFT or Adobe from a valuation perspective.
The fact that writing software is central to all these businesses doesn't mean they are in the same business. These are real businesses making real money. I just don't think they have the same stability.
>Let's do some simple math here, folks. Assume you bought an entire company that had $100 in revenues and 50% profit margins. And that you paid just two times revenues, or $200. It would still take you four years to break even with revenues holding steady.
The company he describes is in fact a fabulous buy, with a PE of 4. His mistake is to completely discount cash flows past the fourth year. You still own the company after four years, so unless it is set to self destruct, it is worth a lot more than the $200 you paid for it. A non-bubble growth tech company with those margins would typically be worth $1000+.
He's also ignorant of history. Great companies like Google and Microsoft had very high PEs in their early years, which many investors balked at. Those who could stomach the valuations made a mint.
Another way to value companies is to look at comparables that aren't affected by the bubble. For example, Yahoo has been bouncing between 20 and 30 billion -- a valuation that has held up for years. Facebook has similar revenue potential but much better execution and vastly higher growth. Valuing it at 2-3x Yahoo looks reasonable in my book.
He may well be right that some of the companies in the article are overpriced, but he makes a very weak case for his argument.
Adding up the profits until it equals the sum of your investment is an extremely crude measure, because it leaves out what you most care about -- how much the company is worth at the end of the initial time period.
P2.1 P/E is also crude.
P2.2 How much the company is worth at the end of the initial time period is certainly not what I most care about. If it is not viable also as a buy-to-hold, then you are playing greater fool speculation.
P2.3 It gives a useful perspective on the information. Where will Google be in 23.74 years? Will it still be a viable model? Will quantum computing have been proved so I can have a search engine in my pocket? Will all searching have to be social? Will Bing and Facebook become viable alternatives in the next year, driving down Google's margins? Will they ever pay a dividend, or will they keep re-investing until they go bust? My money will be locked up for 23.74 years, and there might be nothing at the end.
But Facebook is doing much more than that these days. The pages which served the news during the country unrest has now gathered on Facebook and planned anti-government protests virtually, and then in real life. The result was today 100K protesters in my city (of around 700K). The result was also the constitution of a team from different cities that is now leading the strikes.
The current protests may change the government. And if it did, Facebook is doing more than diffusing information: It's building an entire generation. That's because the current protests wouldn't exist if Facebook (or an alternative social network) wasn't there.
For information there are around 1.5 million using Facebook here and the revolution union in Facebook has around the 1 million fans. That is if compared to the USA, that page should have around 200 million fans.
Let's take a look: http://www.msnbc.msn.com/id/41521349/ns/business-us_business...
That's 250m of net income in the last quarter, more than the 200m generated in the entirety of 2009. In addition, they anticipate 2011 EBITDA of $2b (of course that's different from income, but given that FB has no debt, and depreciation is just the fractional cost of hardware, net income must be above $1.3b in 2011). I personally believe that profits will rise to the $5b annual range within 5 years, which would give it a 12 P/E valuation if it stayed at the current valuation. (But look at Google)
Anyway, I am confident that FB's financials will justify its valuation when the IPO comes along. I don't doubt that Goldman is here to make a killing.
Facebook isn't focused on turning on the money faucet right now. There are so many ways to generate cash that it'll focus on soon.