The one thing I remember from Professor Rossell's managerial accounting class in Business School: There is only one response to any financial question:
"Who wants to know?"
For example, "How much did you earn?"
To the stockholders: "A lot."
To the employees: "A little."
To the IRS: "Nothing."
I imagine Professor Rossell's response to "Is Facebook overvalued?" would be, "To whom?"
In the short term, the price is determined by the dumbest person with access to a checkbook. In the long term, the price is determined by smart people, because the dumb people are broke.
It's actually a well known economic phenomenon when there is an auction situation and for sure FB managed to organized an auction: the "winner curse"...
That depends on whether Facebook can ever monetize their users to an extent great enough to generate the profits that would cover such a valuation. Right now it's not looking so good. There is only so much growth they're going to get in the west (which is where users are worth money) and growing elsewhere is more of a strain on resources than something that will generate revenue.
Search advertising seems to monetize so much better than pretty much anything else on the web and that's why Google is sitting pretty. Advertising just doesn't seem to monetize enough on Facebook and the like and the average value of their users keeps going down as the purchasing power of a lot of their growth is small.*
*That's not to say that poor people aren't wonderful, just less valuable to advertise to.
Indeed. Most people I know stop using facebook after college. That bounds the applicable age group to just those who have lots of spare time to use facebook's servers, but with little money to spend on facebook's advertisers.
Really - making valuations on a per user basis? Kind of weird especially considering their growth.
Currently Facebook is projecting $550M in revenues this year, that would put them at about 20x earnings (for 10B valuation). That doesn't consider profit/loss but its a standard measurement. This is a moderate 20x P/E for a growing company and not a horrible valuation.
compare that with twitter's $0 in revenues and you have a better comparison.
MySpace is projecting $490M in revenues so it's inline with Facebook considering they're very close to the same rate, I have to believe that considering the way facebook is growing compared to MySpace that it would get a better valuation (if comparing the two side by side as standalone businesses)
All revenue numbers from pretty much first google hit
Just to clarify: earnings are not revenues. Earnings are revenues - costs. Facebook and Twitter's valuations are both infinitely times their earnings since neither has any earnings right now. However, their negative earnings are still important (especially on a per-user basis).
So, Facebook's P/E ratio is non-existent since they have no earnings.
Here's the deal. Facebook's ads are more like Google's content network. Google's money maker is keyword search based ads.
Most will tell you that the content network is complete and utter shit. A lot of people lose money there.
The search network is much more targeted due to its nature to target based upon search keywords.
Facebook will always be worth something and probably a very valuable something, but it's not of 10 billion or Google proportions if the basis is upon "advertising".
The value to advertisers is in the ability to target their ads. To be able to prequalify people based on their searches was a major technological advance over the unqualified banners sites display.
Facebook is attempting to mimic the prequalification in its use of your interests, your groups, fans, etc all that can be used for advertisers to filter. At this point it's fairly rudimentary, but imagine in the future when the system can apply some intelligence in determining whether or not I'd like to see ads for some product based on all the information Facebook has about me.
The potential is there, but it is not yet fully matured.
However the technological breakthroughs needed for such a system is still not in place. Facebook/Twitter has to put in a log of research into Natural Language Processing Technologies for this scenario to materialize. The cost of that is still unaccounted for.
However the value of correct data is very important here. No doubt the data Facebook has about its users is very valuable. Especially considering the fact that there is a real person on the other end, with a significant amount of real life relationship amongst his/her friends list.
Someone still needs to figure out how can that data be converted into dollars.
>> "Most will tell you that the content network is complete and utter shit. A lot of people lose money there."
It varies massively depending on sector. For some things it works fantastically, and is far cheaper than the search network. I've made money there :/ I actually found it easier to make money on content than on search for what I was doing. YMMV.
I think the argument is flawed to begin with... $/user is just a bad comparison. I am no investment banker but I'd think valuations are calculated via a combination of revenue + growth.
If we look at Facebook's estimated 2009 revenue, which is $550M reported by TechCrunch, the valuation is about 20x. It's a bit overvalued at this point but not unreasonable, especially since Facebook's project revenue almost doubled 2008's.
Revenues are nothing without earnings though. Facebook spends more than it takes in, which can easily be accomplished by anyone (especially as of late!). The valuation is purely on a bet that in the future Facebook will be have more revenue generating capacity. It's a bet, albeit a big one. With so many users it doesn't take a whole lot of profit per user to get to big revenues, but it's far from a sure thing that Facebook will end up worth anything substantial.
Revenue is much harder to get than profit. As an ex-consultant, you can always cut cost to achieve better profit margin. Revenue is a different story.
You are right that valuation is on a bet that Facebook's revenue will continue to grow. But judging from past performance, and Facebook is still a startup, I think it's a pretty safe bet (comparing to Twitter anyway!).
Actually I was a Corporate Finance / M&A guy. Per user multiple is pretty standard for pre-profit companies. Not saying it is the most accurate way to value a company but at this stage of profitability it's a good comparison measure.
(to clarify, I'm the author of the post)
The funny part of the social media bubble is that if you looked at the dot-com era, it looks like financial fraud just like the housing boom: VCs going public with a domain name and no product shipped to cash out before the inevitable implosion.
Except now there is no going public, SOX killed IPOs and the M&A market is hurting too and yet... they're still doing it. So they must have been honest the first time! :)
"Who wants to know?"
For example, "How much did you earn?"
To the stockholders: "A lot."
To the employees: "A little."
To the IRS: "Nothing."
I imagine Professor Rossell's response to "Is Facebook overvalued?" would be, "To whom?"