Posted on

Facebook Valuation–Public & Private

I am a little confused about the amount of kerfuffle over the IPO of Facebook.  I get that it was a huge story.  I have even written about it a few times.

In my last post, I stated that I expected emotion and the greater fool theory to prevail and the stock would jump to $50.  I was wrong.  I didn’t have enough faith in the market.  People are now scratching their head with the same question: what is Facebook worth.

In thinking about this over the weekend, however, it occurred to me that the answer has been out there for some time staring us all in the face: the value of Facebook has been set again and again with the repeated share offerings in the private market.  The last private market valuation, I think, was $70B. [note: need to verify] update: Paul Kedrosky has informed me that the last private market valuations were up to $100B.

That $70B valuation most certainly had a premium built into it based on the presumption that the public market sentiment would carry the stock higher.  However, considering who has access to these private share offerings (read: very sophisticated investors), the price of Facebook had a ceiling on it, and that ceiling was $70B. [update: *cough*$100B]

At the closing price today, the market cap of Facebook is $66.5B, though the true valuation, because of cash on hand, is around $85B.  The right price, based on a $70B market cap plus cash leads to a “correct” price of around $23.50.

Given the stories now surfacing about lead underwriter Morgan Stanley cutting estimates in the middle of the road show, expect that value to trend down even further.

Well, even with the update from Paul, I stand by my assessment. <g>

Posted on

Facebook IPO Food For Thought

I have been thinking a great deal about what the Facebook IPO means.  While reading many posts up at Hacker News about whether we are in a bubble, lamenting Zynga, or skewering Groupon, I am left wondering what will really become of Facebook.

The tl;dr version is that I can’t sign up for Facebook at this price.  I have many friends there, and I am happy for them, but I find the valuation a bit too rich to be comfortable investing.

I started off using Bing Finance to use their stock screener to see if I could paint an interesting picture of how Facebook compares to other public companies.

First I started with valuation.  Setting a minimum valuation of $74B (which is the low end of the Facebook filing range) yields 95 companies.  Notable in that list is my current employer at $101B.  Other notables – Anheuser-Busch ($120B), Apple ($532B), ATT ($193B), Chevron ($203B), Cisco ($102B), Comcast ($79B), GE ($204B), Google ($198B), Intel ($139B), IBM ($235B), McDonalds ($97B), Microsoft ($257B), Merck ($117B), Pfizer ($169B) Qualcomm ($106B), The Home Depot ($78B), The Walt Disney Corp($78B), Verizon ($115B), Visa ($96B).

For my second filter, I wanted to add a revenue line.  According to their S1, for the year end 2011, Facebook had revenues of $3.7B.  I will use that as a min bar.  I then set a max revenue range to $10B, which leaves plenty of room for hyper growth in the first year.  That reduced the list to just one company.  Visa.  The company that makes money on just about every payment transaction in the world.  Further, with earnings per share of $3.57, they have revenues of $8.5B, and a market cap of $96B, the high end of the Facebook filing range.

If I remove the top end filter on revenue, the list of 95 drops to 40.  From my notables list above, the following remain:

Amazon ($48B), Anheuser-Busch ($39B), Apple ($108B), ATT ($114B), Chevron ($244B), Cisco ($43B), Comcast ($56B), GE ($142B), Google ($38B), Intel ($54B), IBM ($107B), McDonalds ($27B), Microsoft ($70B), Merck ($48B), Pfizer ($67B) Qualcomm ($15B), The Home Depot ($70B), The Walt Disney Corp($40B), Verizon ($110B), Visa ($96B).

So none of my “notables” dropped off the list, but it’s important to point out that only one of them has single digit revenues, and only and additional 3 would be under $50B in revenues.

I can already hear people yelling that profits matter, not revenue.  OK, I’ll grant you that.  Since my notable list didn’t reduce, let’s see if adding a third filter, earnings per share, does any pruning.  Facebook’s diluted EPS for 2011 was $0.46.  Setting the min bar to $0.45, and a max to $2.00, the 40 goes to 9, and here’s what’s left of my notables:

Amazon ($1.37), ATT ($0.67), Cisco ($1.17), Comcast ($1.50), GE ($1.23), Pfizer ($1.10) and Verizon ($0.85).

The only one of those with a PE multiple higher than the implied PE of Facebook (76 at the high end of it’s pricing range) is Amazon.  No other company cracks 50, and only 3 are above 20:

ATT (47.8), Pfizer (21.1), Verizon (43.5).

My point in all of this is simply trying to highlight what should be painfully obvious.  Risk.

Each of the 7 companies left in my notables list has a much reduced risk of their main line of product waking up one morning, deciding the company isn’t cool anymore, and moving on to the next thing.  ATT and Verizon have that risk, but what they have going for them is the ability to point to the size and quality of their network infrastructure.  They have hard assets like towers and land leases which are of limited supply, and difficult, if not impossible, to replicate, with incredibly high build out costs for competitors.  Same thing with Comcast.  GE – well they just make a ton of stuff.  Cisco makes less stuff, but R&D is certainly a barrier.  Pfizer – well the drug R&D budgets are legendary, and the process for getting FDA approval is an underfunded-company killer.  Visa has incredible barriers to entry tied to fraud protection they have build, customer acquisition, and the network of businesses using their product.  Paypal, Square and others are certainly making progress here, but it’ll be a while before Visa is really hurting.  For obvious reasons, I can’t comment on Amazon.

The Facebook IPO is exciting, for sure, but I am getting really really nervous that we are setting expectations for our up and coming entrepreneurs in an unrealistic way.  You’ll remember from my last post that I made the point that something is worth what someone will pay for it.  I will not pay $35 for a share of Facebook stock given what I know about the financials published in the S1.  I can hear the criticisms of this analysis, saying that Facebook is a new kind of company, blah blah blah.  That’s incredibly self serving.  Their primary asset is their customer base, which has lock in tied to data (pictures, connections, etc), but I am not sure I agree that cognitively a person would have a stronger connection to a company based on data stored there than they do with their mobile phone plan.  ATT needs $114B in revenue to stay in my notables list – to Facebook’s $4B.  Verizon has revenues of $110B.  Both ATT and Verizon are valued around 45x PE, implied value to Facebook of $20.

For all those who say “well, with 800M customers, they will figure out how to monetize them later” – I don’t even know what to say to that.  If you couldn’t figure it out at 100M, or even 500M, what is another X hundred million customers going to teach you?  Comically, this reminds me of all those pitches to VCs in the late 90s: “the market has 1B people, and if I get just 0.1%, that’s 10M customers.  Think of all that revenue.”  That’s a pitch that would get you thrown out of any VC these days.  Sadly, Facebook has actually acquired all of those customers, and are likely saying “if we can just get 0.1% to monetize at a higher rate…”

The real truth is that Facebook is worth what someone will pay for it, and the greater fool theory prevails here.  Expect the stock to jump above $50 on day one.

Posted on

Microsoft And It’s Two Products

Robert Cringely has an article up at the NY Times about Chrome vs Bing. It’s a fine piece, but there’s a bit in the middle that makes me shake my head:

Microsoft makes most of its money from two products, Microsoft Windows and Microsoft Office. Nearly everything else it makes loses money, sometimes deliberately.

This is not an uncommon refrain, though most times people call MSFT a one trick pony. This continues to confuse me. I sat down with Scoble a couple of weeks ago at the Structure09 conference and we talked about MSFT. He’s a former employee, and he too made this quip when the topic of Bing came up.

I read through the most recent 10-Q for Microsoft to see if I could pull out proof of what I am about to state, but the content wasn’t there. There’s more detail in the 10-K filing from last year, so here goes. If we start from the premise that Microsoft did $60B in revenues in 2008, and Office and Windows are the only products we have, where does that leave us?

Continue reading “Microsoft And It’s Two Products”

Posted on

Google, YouTube and the Drag on Earnings

There’s an interesting article out this morning about the death of YouTube.  Granted, the article is penned by a competitor, so it’s always necessary to take such proclamations with a grain of salt.  However, the article elucidates some interesting data about the massive online video property.

Credit Suisse estimates that YouTube is losing $470 million a year for Google.  That’s a staggering number, and one that is only addressed in the article as the potential for YouTube as a going concern.  How long, the article asks, will Google front the cash to support this loss generator?

As a finance nerd, and GOOG shareholder, I like to think about things a little differently.  What is the implied impact of YouTube to Google shareholders?  Doing some simple math reveals the following:

P/E Multiple 27.86 x
Loss Per Year for YouTube $ (470,000,000)
Implied Market Cap Impact $ (13,094,200,000)
   
GOOG Market Cap $ 117,000,000,000
Price Per Share $ 370.00
Number of Shares 316,216,216
Price Impact of YouTube $ (41.41)

Continue reading “Google, YouTube and the Drag on Earnings”

Posted on

Mint - Refreshingly Useful

I am not the first person to write a review for the financial software service Mint.com.  Nor will I be the last.  However, after using the product for just a week, I felt compelled to reach out to my readers and let them know that if you have as much of a deep seeded hatred for personal financial software tools (*cough* Money…*COUGH* Quicken) as I do, then you have most likely given up on the category entirely.

Myself, I needed another run at a personal financial software tool like I needed another run at dealing with the tech support line at the cable company.  With the impending arrival of my third child, and the economy being in the state in which it is, it is no longer suitable to utter "leave it to me" to my wife when issues of our personal finances come up.  You see, she went to the bank and withdrew a pocket full of "I don’t give a shit" for whenever I would try to insist that my Wharton MBA was sufficient credential for her to avoid such topics.

Any time I have tried to use any of the aforementioned software packages, they would prove too onerous for the family to use.  Further, it was complicated to ensure that we could share a file across machines.  Synchronization became a complete pain in the ass.  Bottom line - I loathed the software.

The number one problem I had with any of these packages was simply getting started.  The need for the opening balance was enough to derail most efforts.  Don’t you dare try to use Quicken or Money without reconciliation of that opening balance.  You want to get your transactions into the system?  Sure, no problem.  Want to have them categorized?  You’re on your own.  Want the data that the bank provides to be enough so that your software would simply figure out how to auto-classify new transaction?   Good luck with that.  Forget to download transactions for a month and you only use your debit card for all transactions?  Your night is ruined.

Continue reading “Mint - Refreshingly Useful”

Posted on

Uncommon Economic Indicators

I am always interested in things that we all notice but don’t quite put together for what they really are.  I think we can all agree that the economy is tough right now.  I’m a little shielded from that with my job and employer doing well enough, so that makes things a little easier.  However, I know that it’s tough times out there for many people, and that bums me out.

My wife came by for a quick visit and we turned it into lunch with daddy at work.  During the conversation, she shared that she had been at the mall with the kids.  She also noted that “the ratio of men to women in the play area is going up during the middle of the week.”  Just last week, when I was on daddy day care last week, I noticed that there were quite a few dudes there as well.

So with the economy on the skids, upward goes the number of men with nothing to do in the middle of the day.  With an eye toward painting a silver lining on things, at least they are getting to spend more time with their kids.

Posted on

Decabox - When Eight Is Enough

DecaboxJust when you thought that technology had advanced the human conversation as far as it could possibly go, the leaders of the esteemed CNBC network give us their newest innovation. First called out as the Octobox by Jon Stewart, he brought the new and improved Decabox to our attention this evening. Having seen this concoction in action, I am at a complete loss as to how this “feature” made it through any semblance of a design review. Two or three talking heads, coupled with the host, is generally sufficient to guarantee a cacophony bordering on the unintelligible. The mere suggestion that the addition of heads four or five should have been an offense worthy of dismissal, but 10 heads. Really? 10? Really? I now refer you to Garrity’s Law:

The intellect of individuals in a group decreases exponentially as the number of individuals in the group increases.

This holds true for a meeting of any kind, especially one where television cameras and a national audience are involved. Yeeessh…

Posted on

Rally or Dead Cats?

Largest One Day Advanve EverYou know, the funny thing about rallies in the market these days, especially the largest one day gain by a country mile, is that it’s hard to know what’s driving the move. There’s an old saying about the markets, and it relates to dead cats. I am in no way equipped to make market prognostications given the current turmoil, but it’s hard to look at the advances today and not think that there is something along the lines of a dead cat bounce happening.

Dead CatsThe funny thing (depending on your point of view) is that the darn things bounce pretty high when they have had as far a fall as the Dow has seen in the last month. Recall, we’ve seen 26% decline in the last month alone. Is now the time to stand up and cheer about the policies working, or a time to sit back and mull over the realities of the market positioning and where things are going? I’m not sure which it is, but I would really hate for a bunch of people to start congratulating themselves with high-fives and back slaps around the notion that “the plan is working.” We simply do have enough data at this point to call it.

Posted on

The Credit Crisis That Stole Christmas

From Techcrunch: It’s Going To Be A Grinch Christmas: Slowdown Forecast For Online Holiday Sales

There’s been discussion about consumers spending less this winter shopping season, and how the credit crisis is the culprit. I would like to introduce a thought here, and one that extends a little further down the rabbit hole. Consider for a moment that demand destruction has in fact occurred. Consumers are scared and are holding back purchases - everyone understands that concept. However, the new construct I would like to introduce is the notion that demand destruction will not exceed supply destruction.

What did that mean exactly? Most retailers, specifically consumer focused retailers, tend to turn profitable around Thanksgiving. That’s one of the reasons why the day after Thanksgiving is called Black Friday. This is directly tied to demand coming in the front door (actual or virtual) of the business. It’s possible that the exogeneous factor of the credit crisis may delay Black Friday, and in fact keep the year in the red. However, if one also considers the reduced ability to borrow, things get even more challenging for the retailers to turn profitable.

Retailers need to stock up inventory ahead of their selling season. Inventory is taken on credit terms. Whether it’s a “net X day” payable, with the ability to return the goods if unsold, or borrowing against the value of the inventory is irrelevant. Someone, somewhere, needs to borrow funds to make the stuff. If the ability to borrow is impacted, whether by higher interest rates (pushing down margins and borrowing power), or borrowing is negated all together, the retailer themselves will be harmed because they will have reduced inventories to sell. With reduced inventories, retailers will be challenged to hit their “black” date.

This puzzle becomes ever more challenging when you consider psychological factors on pricing. To wit, if retailers fear reduced demand, they may start jumping the gun and offering sales, at reduced prices (and thus reduced margins), to spur demand. This will have the perverse effect of pushing out even furhter the date at which they would turn black. An even bleaker picture could envision inventories running out, and credit not being there to keep up with even a reduced demand, at reduced margins.

I can say this - I would not want to be long any retailers for the next two quarters.

Posted on

Not Occam’s Razor

From Politico.com:

Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages.

I will, for the most part, stay away from political issues on this blog. No need to incesnse half my audience, one way or the other. That said, I find this demonstration of our government at work too difficult to let go.

That’s my emphasis above. Somehow the bill managed to go from a pamphlet to a novel. Never mind the fact that the cost of this thing has swelled over 20% from the original ask. If you have an opinion one way or the other on this thing, I suggest you let your congress person and/or senator know what you think. You don’t get to complain if you don’t vote, whether by way of your actual vote in November, or your proverbial vote with a phone call to your representatives.