{"id":2809,"date":"2011-01-09T04:54:28","date_gmt":"2011-01-09T11:54:28","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=2809"},"modified":"2018-08-16T17:25:00","modified_gmt":"2018-08-16T21:25:00","slug":"facebook-hubub-worrisome","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/01\/09\/facebook-hubub-worrisome\/","title":{"rendered":"Facebook hubub worrisome"},"content":{"rendered":"

This week the investment world was all atwitter about a round of private financing done on behalf of Facebook.\u00a0 The offering documents for the round of money raising for the company valued Facebook at over $50 billion.\u00a0 Is this valuation reasonable?\u00a0 And what does this valuation remind me of?<\/span><\/p>\n

First,\u00a0the $50 billion\u00a0valuation is higher than a business like Time Warner.\u00a0 Time Warner has decades worth of valuable content and also has many very well known, important and stable brands.\u00a0 Multiple brands means a diversified portfolio with lots of potential ways to earn money and less risk than Facebook would likely have.<\/span><\/p>\n

Second, the offering papers showed Facebook had $1.2 billion of revenues in the first 9 months of 2010.\u00a0 If we conservatively annualize those revenues – that is, if we assume growth was even throughout the four quarters of 2010 – then annual revenues at Facebook were probably around $1.6 billion.\u00a0 This is calculated as: $1.2 billion x 4\/3 = $1.6 billion.\u00a0 Now what kind of price to sales is that $50 billion assumed value?\u00a0 31.25x (!).<\/span><\/p>\n

Typically it is considered beyond aggressive to value a business beyond 5x revenues.\u00a0 Hmmm.<\/span><\/p>\n

Third, the offering documents showed that Facebook had earnings of $355 million in the first 9 months of 2010.\u00a0 Remember how to annualize the figure?\u00a0 $355 million x 4\/3 = estimated full year 2010 earnings of $473.3 million.\u00a0 So what kind of price\/earnings ratio does that $50 billion number imply?\u00a0 105.6x (!).<\/span><\/p>\n

Analysis:<\/strong>Can I just say that this worries me?\u00a0 It’s not that Facebook isn’t wonderful and that it isn’t amazing and the cat’s meow and all of that.\u00a0 No, it’s that Facebook is being valued as a monopolist of tremendous proportions.\u00a0 It’s that, as an investor, it is very difficult to make money in a 106x P\/E business.\u00a0 When I see valuation numbers like this I am reminded of that era of craziness, the dot.com era.\u00a0 And what is worrisome to me is that some of the innate human silliness (i.e.\u00a0foolishness and greed)\u00a0that was so apparent in the dot.com era is apparently still not been bled out of investors.\u00a0 The Facebook deal is even more disappointing when you consider that the investors that were allowed to participate in the offering are very, very wealthy, presumably sophisticated, investors.<\/span><\/p>\n

I have been hoping that the Great Recession had seared into the minds of investors, at least for one generation, that speculative bubbles are a bad thing.\u00a0 This is the first piece of evidence that indicates that the ugliness that nearly resulted in another Great Depression<\/strong> is still pretty close to the surface.\u00a0 Sigh!<\/span><\/p>\n

Yes, I know Facebook is in its infancy.\u00a0 That it may grow into those valuation metrics.\u00a0 That is may be the second coming.\u00a0 However, as I caution about in my book, The Intuitive Investor<\/a>, investing in archetypes (the Rocket\u00a0Ship)\u00a0is very dangerous.\u00a0 The danger is that reason starts to fail, and instead the imagination runs rampant.<\/span><\/p>\n

Importance grade:<\/strong>3; Facebook is the first data that contradicts all of the other data that people have been weened of bubble-mentality.\u00a0 It may be that this is a harbinger.\u00a0 It may be that this is just a singular occurrence for, what apparently is, a singular company.\u00a0 I hope so.<\/span><\/p>\n

Jason<\/span><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

This week the investment world was all atwitter about a round of private financing done on behalf of Facebook.\u00a0 The offering documents for the round of money raising for the company valued Facebook at over $50 billion.\u00a0 Is this valuation reasonable?\u00a0 And what does this valuation remind me of? First,\u00a0the $50 billion\u00a0valuation is higher than […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3,14],"tags":[],"class_list":["post-2809","post","type-post","status-publish","format-standard","hentry","category-the-blog","category-worst-of-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2809","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=2809"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2809\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=2809"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=2809"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=2809"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}