I'm not really sure why everybody here is so bearish on FB.
Sure, its an unproven company with a high P/E ratio, but so are most tech startups when they go IPO.
I think Zuckerberg has shown that he knows how to innovate, grow the company, and even make painful changes that eventually lead to more growth and profit.
There is at least a decent chance that FB will refine their business model and turn into a large, stable technology company with good returns.
I think the big stumbling block is that Facebook's growth is getting population limited. That is remarkable to even think about, but they're running out people left on Earth that don't have a Facebook account.
So your opinion on Facebook's (financial) value really comes down to how much money you think they can make per user. Their current system seems to be 'show the user ads based on the users hobbies, interests, likes, etc'. That isn't massively effective for them, at least compared to a Google ad that has more 'intent' to it.
Now, if they start actually going through posts and pictures similar to how Gmail scans your email to contextualize the ads, that might bump up the ad relevancy and increase their margins. But a lot of people will complain about privacy (as was seen when Gmail started doing that).
Alternatively, Facebook could figure out some way to really monetize your social graph. Something more than just showing you personally ads. Maybe a recommendation engine or something like that, but whatever it is needs to be an order of magnitude greater revenue than what they have now.
I think if you don't believe they are going to make some kind of revolutionary change, then you end up being bearish on Facebook.
And then some people just simply don't like Facebook. Whether because it looks too much like something the popular kids like, or because most hackers are contrarians by nature, or because Facebook plays fast and loose with privacy at times, or because some people don't like PHP (I don't know, some of the haters have random reasons), people just hate on Facebook.
I think the big stumbling block is that Facebook's growth is getting population limited
I know some people who use Facebook once or twice an hour while others use it once or twice a year. Both of those users are counted the same when people talk about being population-limited.
There's still room for growth, although I'm not about to claim that they are overvalued.
In other words, you're simply wrong that Facebook is running out of people who don't have a Facebook account. I might buy that Facebook is running out of people that don't speak the languages it supports though.
Your approach to estimating Facebook growth by languages supported is interesting but I suspect fundamentally flawed. There's an incredible long tail when it comes to languages spoken, especially when multilingual individuals who speak both an obscure regional language and a more common one are taken into account.
http://en.wikipedia.org/wiki/List_of_languages_by_number_of_... gives a great overview of this long tail - with 70 languages, Facebook probably cover all but a few hundred million people. Simply by comparing the top 25 languages spoken with the languages Facebook support, you can see that several billion people should be able to access Facebook based on language numbers, but yet they only have 900 million users.
I strongly suspect that "working internet-enabled device available frequently" is a much better way to estimate potential Facebook adoption than language support. Having never run the numbers, though, I neither support nor refute that Facebook is running out of potential account-holders.
1. I wasn't trying to estimate Facebook's growth. I was merely trying to refute the notion that Facebook is running out of people to use their service. My method is arguably quick and dirty, but it makes for a good heuristic, doesn't it? It's enough to tell me that it's probably not worth my time to try and dig up better data.
2. Fine. The number I gave of 6910 probably was too high, but 70 is still less than half of the languages mentioned in your link. If they have 900 million users, that's less than half of the people in the world who have internet access[1]. Thus, it would seem that although there are certainly a number of problems with my approach, the evidence we have so far would seem to indicate that it did the job I intended it to do, doesn't it?
Suppose you expect Facebook to grow at 50% per year. How long until you run out of internet users?
50% for the next several years is not an outrageous expectation given their 25x sales multiple. I haven't done the math because I'm both busy and lazy, but I suspect it is actually a good bit lower than what is implied by such massive multiples.
They are indeed running out of people to sign up. On the planet. That is amazing. So amazing, I would argue, that one could imagine governments getting nervous. When's the last time you saw that in a prospectus?
They won't actually run out of course, but I expect their user growth rate to rapidly approach the low single digits. Which leaves an awful lot of innovating money extraction to provide the absurdly high valuations they've asked for and gotten. Time will tell.
Say we assume that all users have the same economic value to Facebook (an extremely unlikely assumption; it's most likely that the first billion have much more discretionary income than the rest). Assuming Facebook gets the remaining 5.9 billion humans (including all those without Internet), they will only be able to increase their userbase by 7.5X.
Assuming the world 'wants' businesses to have a P/E ratio of around ~15, Facebook either believes in the two above totally fallacious assumptions (they don't), or they anticipate rolling out new revenue strategies to create value.
How many people on Earth are there who don't speak one of the 70 languages, though? Imagine if they didn't support German. How many Germans speak English, or French, or even Russian? A lot. So while they might not support Tagalog, how many Tagalog speakers don't also know how to speak Filipino?
Going on basis of language support is ridiculous at best without weighting how many exclusive speakers there are in that language. I might buy that Facebook is running out of people who don't have fresh water, paved roads, electricity, or high speed Internet connections.
Of course it's a flawed approach. I was responding to a comment on HN, not writing a paper in an academic journal. Yes, if I really wanted get proper data, I would do the things you mention.
But please give me some credit. The comment I responded to offered no data points whatsoever. If I offered one piece of data that showed someone something, isn't that a net positive?
I don't think that really has anything to with it at all.
It comes down to how many people in the world are connected to the internet. I've seen a lot of numbers around 2 billion people. Facebook has 900 million users.
Even if they got every person on earth, thats only 7x growth (and that would be impossible).
Their valuation is not based on 2x or 6x growth, their valuation requires an order of magnitude of revenue growth. There are not an order of magnitude more users left on this planet. And that completely ignores the fact that most of the remaining people aren't as valuable to advertisers.
I'm yet to see a single solid and empirical evidence that they have actual potential for growth. Other than the very foggy, subjective and certainly doubtful argument of "but Zuck is smart, he'll figure something out".
Which is a logical fallacy called argument from ignorance. Betting the future of your money on a logical fallacy, is sure not smart.
Facebook needs to figure how to make an extremely high profit from mobile. Which is just another mobile messaging app like thousands of others. No messaging app in the history of humanity has ever figured out a genius revenue model. Facebook needs to find an innovation that thousands of others have failed to. Name one single innovation Facebook has ever come up with, that is as big as this one they need. That would justify your confidence on their growth potential.
I haven't seen a single solid reason yet.
Other companies have IPO'ed when there was a very clear path for growth. When they had just a small share of a potentially huge market, or when there were clear monetization strategies they just didn't implement yet for lack of time. Facebook fails both these checks, there aren't many more users for them to acquire and it seems they've already tried everything in their repertoire to milk each user. Coming out of these spot thinking "oh whatever, they'll figure something out" isn't a good reason to be bullish.
"I'm not really sure why everybody here is so bearish on FB."
Here and everywher 100 Billion $ valuation for FB is nuts.
"its an unproven company with a high P/E ratio, but so are most tech startups when they go IPO."
Startups do not IPO at 100 Billion but at hundreds of times less.
"I think Zuckerberg has shown that he knows how to innovate, grow the company, and even make painful changes that eventually lead to more growth and profit."
Zuck has shown that he is able to make people use their system. He has not show that people COULD PAY for this system for a 100 Billion company.
"Is this some kind of HN Schadenfreude?"
Schadenfreude means enjoying the misfortune of others. MZ and other founders are going to make less bilions for their work in single years, is that misfortune?. I don't think so.
FB valuation is going to be cheaper for those that buy in the future. This is good news.
I'm cautiously bullish too. Been planning to write a blog post about this, but I'm in the middle of finals right now. Anyway, summarised:
- They still have lots of growth potential in Asia, and other places as more and more of the planet comes online.
- Zuckerberg is a Gates-style evil genius. Being grey hat is bad for PR, but good for figuring out monetisation. (cf Twitter, loved by the Valley and make no money). He is also able to make painful changes that are widely mocked but turn out to be right (news feed etc).
- Facebook has lasted longer than the previous "hype cycle" for social networks. So it won't fall like MySpace, Friendster. (My theory: early SNs were mostly used by early adopters who get bored quickly. Facebook has crossed the chasm and the mainstream users aren't so keen to switch).
- Think of all the people who've said they're going to quit. How many have? Have you? FB has made a really, really sticky product; which again, goes back to the "grey hat" streak in the company.
- Finally monetisation. Display ads suck. But companies spend a ton on FB marketing (for pages and so on), and FB doesn't yet capture that value.
Ex 1: Facebook likes are now sold on the grey market. Ex 2: In Malaysia I saw graffiti promoting someone's FB fan page. Ex 3: Have you noticed how your local cafe/pub/restaurant now asks you to "like" them? I had a friend who got paid £500 to set up a Facebook page for a small business; sure, the business owner overpaid, but the point is that FB marketing is worth a lot to such companies. If Facebook can capture that value, they're set.
- There's also "black swan" revenue streams. A few years ago, who would have predicted virtual vegetables would have accounted for over 10% of FB's revenues? There might be more unknown opportunities like that in the future.
I still think the stock is risky, as there's every chance this won't happen. But, say Facebook does succeed as planned; I think one FB employee said they've only done 5% of what they set out to do. Imagine 10 years time: a guy in Kazakhstan buys his first smartphone. Activating the phone requires a FB account. His contact list is his FB friends list. Instead of SMS, it's FB chat. That's the scale I imagine Zuck is thinking at.
Admittedly, that's an unlikely scenario. But if it happens, Facebook could be worth two, three hundred billion, or more. Do a simple multiplication, probability times upside, and suddenly $70 billion might not seem like so much.
I'm neutral on FB's 'correct' value but think some of your comparisons are misplaced. It has beaten out other social networking offerings, but then AOL beat out Prodigy, Compuserve and various other competitors back in the 90s. I'm not as sure as you about the stickiness; I'm less social than the average person, but I only log into FBonce a month, at most.
- There's also "black swan" revenue streams. A few years ago, who would have predicted virtual vegetables would have accounted for over 10% of FB's revenues? There might be more unknown opportunities like that in the future.
That's a major weakness to me. Virtual goods are, by definition, Veblen goods, and thus the demand for them is highly elastic. Even if all your virtual eggs hatch into virtual chickens, you can't eat them; so there's no assurance that demand for virtual chickens will continue. You might find it illuminating to study the ups and downs of the Second Life land market.
BTW, Sebastian Marshall is 'lionhearted' on HN, no 'lionheart'.
"Might be worth $200-$300 bn eventually" doesn't justify "worth $100 bn now" unless you believe that either:
1. That outcome is highly probable
2. That outcome will occur very quickly (within 2-3 years.)
Let's say we believe the low end of that ($200bn, or 100% growth.) If we believe that will happen in 3 years, that's about 25% growth in market value annually (and a much larger rate of growth in revenues / profits to produce that, since they'll need about a 10X change to balance the multiple compression that will occur as they grow.)
The potential for 25% annual returns isn't anything to sneeze at. But that's what we're saying the "upside" scenario is... 25% stock returns with a company achieving something like 200% growth in profits annually (which seems highly unlikely.) The numbers are pretty unforgiving.
Thanks for the reply -- the valuation method I mentioned was obviously too crude, so I was hoping someone would call me out on it. I don't know much about finance but I'm actively trying to teach myself. Anyway, it would be good to find a more reliable way to quantify a company's long-term, potentially risky growth opportunities.
There's a million models, but there isn't going to be one that's universally correct. The problem is that the inputs are generally too subjective and too noisy in any model that includes future earnings (there are some conservative ones that are based only only on past performance, but they will never match with an IPO valuation.)
A great place to start is this book: Value Investing: From Graham to Buffett and Beyond ... by Bruce C. N. Greenwald ... most folks will say it's too conservative but it's a starting place.
Making users accept a UI redesign is one thing. Making lots of billions out of them is another. Plus, advertisers and not regular users are Facebook's paying customers (unless Facebook starts a subscription model).
Attracting users to sign up and attracting advertisers to pay are two completely, different, challenges.
Well, when I look at companies that I might legitimately invest in, arguably the most important question is "what kind of room for growth is there?"
Without getting too deep, its not hard to see Google become more than an ads company in the near future. Google Research. Google (self-driving) cars. Google ISP. Google Space Mining. Google the hardware manufacturer (hello moto).
It's very difficult from my little point of view to see the same thing happening with Facebook. Their room for growth seems an awful lot smaller than most other companies worth investing in, and with their stats (higher market cap than Ford, huge P/E, etc), one would have to expect massive room for growth, but they haven't floated much in terms of monetization ideas other than ads and things that people may not like very much (privacy intrusive things, etc)
The big win I see right now is that Google has a stable of brilliant researches in Google Research, and that is something that could be producing high quality industrial research for decades (Microsoft has a similar department). I actually think that Research departments are the long-term investment a company does, they will produce new and interesting concepts.
I have never heard of a similar group for Facebook. I am sure they could put one together, but it takes years and years to get the right people and environment.
Google is everywhere, in everything. Google built a platform that allows others to build businesses on.
I'm getting quite scared of them as well, but there's no comparing them with Facebook. Google has moved beyond just advertisements. Android, Chrome, ChromeOS, Autonomous Cars, GMail, to name a few.
Facebook is a colossal failure in the making, and I'm actually enjoying watching the stock fall.
Disclosure: I have no connection to either company. I am a privacy advocate and think both will eventually become harmful to society at large.
Google isn't strictly in the "get eyeballs, show ads" business - their meteoric success has been due to ad brokering, not the showing of the ads themselves. In short, they show ads to other people's eyeballs - being the broker is a much, much stronger position than being the one who has to collect all the pageviews.
I don't think people are bearish on FB, they are bearish at the current valuation of ~100B.
Say, if the FB IPO was at $1 Billion valuation, then the same people would have been bullish on it.
People here are bearish on FB because they 1. have a conscience and 2. understand the company's business (the simple technology).
People here are bullish on FB because they either 1. lack a conscience or 2. do not understand the company's business (the simple technology), or both.
This is one of the most genius moves ever. Bloat the value of the stock to a point where all the current investors can get out and make their money back on the IPO. Once they have their money back it no longer matters weather the truth comes out that actually hitting numbers like 25% growth for 10 years is almost an impossible feat, especially for a company that isn't diverse.
Stock prices rise and fall based on the popularity of the brand. Sure earnings and other announcements nudge a stock up or down for a week or two, but it's really the reputation of the brand that keeps the price up. In this regard FB's biggest risk is people will get bored of FB. This is a risk Google hasn't had to face yet, as everyone still relies on Google for search, but FB is mostly for entertainment, and people will eventually get bored of it. Remember yahoo?
Ultimately, it's profits that drive the value of a stock, not the brand. Yes, Apple is a popular brand. But you can't really say the same for Chevron, Exxon or Merck, all of which are top 20 stocks.
I think the FB price will settle before too long at a more realistic <$10. People who paid $38+ are fools who were taken for a ride.
However, they ought to be thanked because it is them that keep the markets functioning. Every time someone makes a profit by buying cheap and selling dear, there is someone else who pays for that profit by buying dear and selling cheap.
I think the negative comments which came out recently regarding possible threats to earnings from the mobile platform, GM pulling their ads from Facebook and the increase in the offering size all contributed towards this downfall. I think when Facebook comes out with their earnings next quarter, people will have a better idea where the company is headed and the shares might get a higher bid.
I'm long and strong $FB via the IPO, but I think we're going to have a year of pain before we're in the clear. Facebook needs to prove that they can continue grow-- not an easy feat for a company with huge market share. I want to see Facebook redefine the market by developing better ways to monetize the social graph (duh!). I think mobile has potential, particularly outside of the US, but success will require great execution. It will be interesting to see if Facebook can retain talent with options priced off the public valuation and a stock that is stagnating (or worse, declining).
Sadly, you're going to lose a lot of money. Facebook cannot possibly bring in the required revenue for growth. Their base will erode far faster than new business will come on board. The IPO was the bubble bursting, making the insiders rich, and laying the ruin for everyone who jumped in.
But they "only" sold 18 billion, that leaves insiders still holding 92 billion of FB. If this were really a bubble bursting wouldn't the rich insiders be holding a much smaller chunk of the fool's gold.
He made billions on the IPO... I think that he is less concerned with the future of Facebook than you think. They'll no doubt attempt to provide shareholder value, but will likely find it impossible without truly turning to the dark side. In the end, it can be sold off, and he'll still be set for life.
Most of the IPO purchasers would've shed their shares on Friday and yesterday(volume was crazy on both days) and now the regular joes are left holding the bag. In fact, some of the big sharks have sold off their shares on Friday and went short on the stock, so they're making bank on this.
I would classify Morgan Stanley as a whale, not a shark. Can't find the article right now, but I read yesterday about big client of one of the underwriters saying he went through with the purchase of the IPO but dumped shares early and went short. These are the smart guys.
I tried to come up with an appropriate rebuttal, but you're right - it wasn't the middle class that was taken advantage of here, it was truly the "dumb money" who decided to buy a stock with a 100:1 PE ratio. Point taken.
Sure, its an unproven company with a high P/E ratio, but so are most tech startups when they go IPO.
I think Zuckerberg has shown that he knows how to innovate, grow the company, and even make painful changes that eventually lead to more growth and profit.
There is at least a decent chance that FB will refine their business model and turn into a large, stable technology company with good returns.
Is this some kind of HN Schadenfreude?