Why do people get excited about profits of a company that never pays dividends? Is it about preservation of capital? Or a hope to see a trickle down effect of dividend payments at some point?
The retained profits (much of which go to productive activities such as R&D) add to the value of the company. Theoretically, the market should see this and then revalue shares accordingly.
The fact that Google is trading on the open market, as compared to Facebook's makes these two valuations hard to compare directly.
SecondMarket aside, when valuations are based on participants (insiders & investors) who have no reason to be skeptical/down-to-earth (is there any way to "short" a startup and affect it's valuation?), they are bound to be somewhat exuberant.
Respectfully, the premise of this question is incorrect. You are essentially saying "Superman can fly on TV, so it doesn't seem so insane that I could fly in real life does it?"
There are several ways to measure value. For example, the stock market value of a company is based on its perceived future value. The value I prescribe to is a measure of how efficiently the business turn its capital/revenues into profit.
Because it's still a privately owned company, only small amounts of Facebook stock can be purchased by an exclusive club of Goldman Sachs' best buddies. That's the only reason for the absurdly high valuation. If this stock begins trading at $70B there's nothing to stop every hedge fund in the world from short selling it into the ground. Wall Street was skeptical of Google too but they proved everyone wrong once the ad money started rolling in.
Looks like somebody is trying to cash in their chips before the casino burns down.
Facebook is so massively overvalued that the only thing smart people can do is consider this period being close to the high water mark and get ready to get out while the getting is good. I don't think the swelling dot com bubble will be anything like the one at the turn of the century, particularly in the sense that I don't think many of these overvalued companies will actually fold, but I think it's safe to say that how ever it turns out, some folks are going to lose a warchest full of capital investment by the time this is done.
I don't think facebook is overvalued. The bubble aspect of the current situation is due to the increased allocation of capital into the tech industry because of big successes such as Facebook, Groupon, LinkedIn, etc. The worry is that this infusion of capital will result in 'bad' companies getting funded.
Considering how many startups are being founded by MBAs these days (MBAs will always follow the money), you have to wonder if they are all really creating something worthy of their sky high valuations.
I'm not surprised by this. One of the things about the non-bubble bubble is that its driven by 'qualified' investors who, in theory, are better able to evaluate such deals on their own.
That FB has apparently reached an equilibrium somewhere shy of 50% of Google's valuation is a good thing for reigning in speculation.
But as a company that has seen a lot of second market type of motion, I have to wonder if this makes an IPO a real non-deal. Perhaps Facebook might simply shift from private to public without offering any (or only a token amount) of equity since they will already have a big chunk of equity in the hands of non-insider investors.
I agree with the quote that says the company is already priced for perfect execution, if you buy in now its hard to believe your return would out perform the market.
1) If you believe FB will be worth $140+ billion in a few years, but you want money now/have a fund coming due it might make sense to sell at $70 billion.
2) If you believe FB will be worth $140+ billion in a few years, and can afford to wait it might make sense to buy at $70 billion.
The savvy investors probably don't have enough confidence in Facebook to IPO. Zuckerberg is still being sued by more than 2 parties in court. And time's running out for trendy startups to IPO and steal as much of grandma and grandpa's pension funds (what's left of it) before the stock market and the dollar collapses. Although maybe if Obama was re-elected Mark would have a chance to get those court cases thrown out.
So if $1 billion in shares trade hands at x valuation, does that prove Facebook is in fact worth >= $33 billion? I find it difficult to believe the value of FB shares is anything other than what people are paying for it when a whole billion dollars worth of shares trade hands.
We could argue the semantics of 'worth' again ( http://news.ycombinator.com/item?id=1719975 ) and whether the long term value is way off base to its current value, but the evidence is overwhelming that FB is currently worth tens of billions of dollars.
By this logic, there was a point in time in Amsterdam when some tulip bulbs were "worth" more than large houses. You are technically correct that facebook is currently worth tens of billions of dollars, but is that real, lasting value or is it a transient inflation of price caused by lots of people investing with very imperfect knowledge of the company and the market? An IPO might reveal the truth.
By that logic, only sustaining value for some period of x days would allow you to say the value of something is y. That doesn't seem accurate to me. How many days is x?
I don't think it's schedule-driven, I think it's event driven. In particular, I think that there are two events that value must survive in order to be demonstrated real:
1: End of severe information asymmetries (going from private to public--i.e. an IPO--will typically do this).
2: A crisis of confidence. A crisis of confidence can temporarily depress the market valuation of something with real value, but the fundamental underlying strengths will drive the price will recover as the crisis abates; inflated value will not recover in this manner after a crisis of confidence because the crisis will have served to expose the fundamental underlying weakness.
in at 50B valuation or less, several months later - out at 70B. With such a good deal, it would be very unreasonable to wait for 100B, 200B or whatever, if any, in the future. Especially if one thinks that initial swell of valuation typical for the days right after IPO has already happened without the actual IPO taking place.
I wonder how many shares of Facebook are available to be bought in any market. If the shares are indirectly rationed by Facebook through their approval of any shares being sold, wouldn't this create an artificial limited supply of Facebook shares?
My guess is they have right of first refusal for any ex-employees selling shares. So the ex-employees would have to sell to someone sanctioned by Facebook, or the ex-employees could force Facebook to buy the shares back from them if they found a willing buyer that Facebook didn't approve. With current employees, Facebook probably has a lot more control over who they can sell to. (It may be limited to people who already own shares)
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[ 2.7 ms ] story [ 53.5 ms ] threadGoogle also had a reported $8 billion in profits, and it's been suggested that Facebook's profits are meager.
Google also operates in a segment of the industry that is much less fad-driven.
SecondMarket aside, when valuations are based on participants (insiders & investors) who have no reason to be skeptical/down-to-earth (is there any way to "short" a startup and affect it's valuation?), they are bound to be somewhat exuberant.
There are several ways to measure value. For example, the stock market value of a company is based on its perceived future value. The value I prescribe to is a measure of how efficiently the business turn its capital/revenues into profit.
Businesses are about profit, and little else.
Facebook is so massively overvalued that the only thing smart people can do is consider this period being close to the high water mark and get ready to get out while the getting is good. I don't think the swelling dot com bubble will be anything like the one at the turn of the century, particularly in the sense that I don't think many of these overvalued companies will actually fold, but I think it's safe to say that how ever it turns out, some folks are going to lose a warchest full of capital investment by the time this is done.
Considering how many startups are being founded by MBAs these days (MBAs will always follow the money), you have to wonder if they are all really creating something worthy of their sky high valuations.
1) Founded by just MBA's 2) Raised a lot (relative I guess) of money 3) don't pass your definition "creating something worth"
That FB has apparently reached an equilibrium somewhere shy of 50% of Google's valuation is a good thing for reigning in speculation.
But as a company that has seen a lot of second market type of motion, I have to wonder if this makes an IPO a real non-deal. Perhaps Facebook might simply shift from private to public without offering any (or only a token amount) of equity since they will already have a big chunk of equity in the hands of non-insider investors.
I agree with the quote that says the company is already priced for perfect execution, if you buy in now its hard to believe your return would out perform the market.
2) If you believe FB will be worth $140+ billion in a few years, and can afford to wait it might make sense to buy at $70 billion.
We could argue the semantics of 'worth' again ( http://news.ycombinator.com/item?id=1719975 ) and whether the long term value is way off base to its current value, but the evidence is overwhelming that FB is currently worth tens of billions of dollars.
1: End of severe information asymmetries (going from private to public--i.e. an IPO--will typically do this).
2: A crisis of confidence. A crisis of confidence can temporarily depress the market valuation of something with real value, but the fundamental underlying strengths will drive the price will recover as the crisis abates; inflated value will not recover in this manner after a crisis of confidence because the crisis will have served to expose the fundamental underlying weakness.