Reasons why we are going to bust

Anyone else think the markets are just swelling out of control? Post some fun reasons why: Zynga was valued at $5B Facebook valued at $56B !! Copper/lb 425

Those aren’t reasons, those are prices. Why aren’t the valuations justified?

ride the liquidity wave!!!

brain_wash_your_face Wrote: ------------------------------------------------------- > Those aren’t reasons, those are prices. Why > aren’t the valuations justified? Brain_wash makes a good point as usual. I can’t comment as to Zynga (wtf is Zynga) or copper, but I *can* make a comment on facebook. Personally, I think the $56B valuation for f/b is incredibly high. And, to give my reason - I’ve worked in both e-commerce and now am lucky enough to work in valuation. I have yet to see a valuation methodology for f/b that I agree with. Here’s a quick version of why: FACTS: -Facebook is huge -Facebook is growing quickly -Facebook users login frequently, and their average visit length is substantial (I think it’s just under 20 minutes, about 10x the average webpage visit). EVERY VALUATION I’VE SEEN then immediately extrapolates these facts into “Facebook must be worth a lot of money based on this”. Without audited financial statements, it’s pretty hard to do a forecast of earnings. Most analysis I see typically use publicly available info such as number of members, growth in member base, and anticipated revenues per member. More often than not, these valuations (either per user or whatever) are taken from something like GOOG or YHOO. However I disagree with using these as starting points without severe adjustments to them. My thinking as to why: -GOOG and YHOO users are on the websites for information - not to socialize -GOOG and YHOO users have far, far, far higher click-thru rates than facebook, because they’ve got much more targeted ads as well as an audience that is, again, on their pages searching for answers (not sexy photos of their stalking victim, which is the only reason I go on facebook). Now, my thinking on the subject is that a valuation based on pageviews for facebook is appropriate, because a given percentage of pageviews for facebook will translate into a given amount of ad-clicks, which’ll in turn become a given amount of income. If you’re one of the people who feels that facebook should be valued as to what it *might* become (pay for ‘premium’ membership! pay for hosting priveleges!), then have at it, but it’s a hell of a lot more assumptions you’re talking about. GOOG trades at damn near $200B. It’s got a near monopoly on search-engine advertising, and an incredibly strong brand. MSFT and YHOO currently would have to devote substantial resources (which they are) to try and dent GOOGs market share (which they haven’t). I find it laughable that a company with years of audited financial statements, twenty-two thousand employees, a huge cash hoard and dominant market share in a very profitable niche is worth only four times as much as private company that’s been around for 6 years, and has the largest-but-not-dominant market share in an industry that is currently still developing. Try and think back - in 2007/2008, I believe MySpace was still the dominant social network, and the fact that Facebook came along and unseated it suggests that this competitive landscape is not exactly set in stone. Wikipedia says that F/B had revenues of $800mm in 2009. Let’s be incredibly optimistic and say $600mm of that hits the bottom line. Would you pay 93x my very-optimistic-earnings for this company? Because I wouldn’t.

brain_wash_your_face Wrote: ------------------------------------------------------- > Those aren’t reasons, those are prices. Why > aren’t the valuations justified? Cause its just a fad. myspace was valued at $6B before we went bust. Plus what supersadface just said. he’s the hardcore buyside Zynga is the company that made farmville and those other internet games I just have a feeling that we are gonna bust.

I agree that Facebook is very hard value as of now and I think the thought process you follow makes sense. There are some facts being left out of this conversation, however. Conversely, I would make a couple of points: -The $56B market cap number is based on an oversubscribed auction of 165k shares. -Facebook actually passed Google in raw traffic (hits, not time) in early 2010 and now has a significant lead: http://www.economist.com/node/17633138. -At one time, Google usurped Yahoo has the dominant search engine. As recently as 2005, Google and Yahoo were roughly neck and neck, with Google obviously having the business momentum. Many at the time though of search as a utility (the online add market was still heating up) and it was not at all clear that Google would become the dominant player. -Unlike Google pre-IPO, there is no question that Facebook is the dominant player in social media. The business model needs to be much different from search, and more targeted, more effective, higher profit margin ads are probably part of that. How it plays out I don’t know, but I really can’t see how this points to any kind of irrational exuberance in the market right now.

supersadface - great post. Can you educate me on e-commerce. I have been on facebook for a number of years. Not once have I decided to click on an ad on facebook. If I want to buy something, I usually google it, research it from google and may click on one of the google ads or buy from a store. I guess I am stuggling to understand how facebook will make money by people clicking on ads. I know they can specifically target their ads based on our wall posts, time spent on the site, likes and dislikes etc., but I just don’t see it.

thommo77 Wrote: ------------------------------------------------------- > supersadface - great post. Can you educate me on > e-commerce. I have been on facebook for a number > of years. Not once have I decided to click on an > ad on facebook. If I want to buy something, I > usually google it, research it from google and may > click on one of the google ads or buy from a > store. I guess I am stuggling to understand how > facebook will make money by people clicking on > ads. I know they can specifically target their > ads based on our wall posts, time spent on the > site, likes and dislikes etc., but I just don’t > see it. I work in buy side, not in e-commerce but a guy on my team does. I’ll give some unsolicited info. -The Facebook ad model is and will be much more targeted and local. Have you ever used Groupon? They are a major advertiser on Facebook, so if group buying is something that is expected to continue (seems Google expects it to continue, given their bid to buy Groupon) then that is a positive for Facebook. -Facebook charges fees for other companies that use its platform. Social gaming is the most prominent example as of now, but it is pretty easy to imagine how other apps could be integrated. Are fantasy sports conducted on Facebook yet? It seems like an obvious medium for that sort of collaborative thing. -Many users of Facebook are young people. These are the future affluent consumers, and they are growing up using Facebook as the hub of their internet experience. Edit: All of this makes me sound like a super bull for Facebook. I am actually pretty lukewarm until we see what the IPO valuation is, I’ve just had it up to my ears in people telling me how it is the most obvious short ever and I don’t see it. There are basically two ways to play it: buy the IPO, ride the pop and then sell or believe in the business fundamentals and buy for the long term.

Justin Bieber

Black Swan Wrote: ------------------------------------------------------- > Justin Bieber I like Justin Bieber. ur move u coc k

Black Swan Wrote: ------------------------------------------------------- > Justin Bieber I don’t think he means that type of busting

dspapo Wrote: ------------------------------------------------------- > Black Swan Wrote: > -------------------------------------------------- > ----- > > Justin Bieber > > > I don’t think he means that type of busting what do u mean?

…like a bubble, Compton and Long Beach now you know your in trouble.

thommo77 Wrote: ------------------------------------------------------- > supersadface - great post. Can you educate me on > e-commerce. I have been on facebook for a number > of years. Not once have I decided to click on an > ad on facebook. If I want to buy something, I > usually google it, research it from google and may > click on one of the google ads or buy from a > store. I guess I am stuggling to understand how > facebook will make money by people clicking on > ads. I know they can specifically target their > ads based on our wall posts, time spent on the > site, likes and dislikes etc., but I just don’t > see it. Thommo- Here’s a primer on what I remember from my time in the field plus what I’ve learned since. I’m assuming you know nothing here, but I’m sure I’m rehashing stuff you’ve already figured out. For that I apologize. Essentially, websites have only two major costs: hosting fees and salaries of employees (programmers, sales, whoever else you’ve got). Salaries are fixed, hosting costs are typically pretty variable. Some websites have a big advantage, because all of their content is user-generated or 3rd party generated. This means that essentially, the website is supplying infrastructure and not content. Facebook and Google are two such sites. This means that they are very much more scalable than, say, ESPN.com. If ESPN.com wants to go from X content to 2x, they need to hire twice as many writers. If facebook wants to go from X users to 2x users, they will not need 2x programmers - probably more programmers and sales reps and some servers, but not 2x more. Ditto for google, because they’re just supplying framework. I know this is an intuitive point, but it’s a big deal; this difference means that growth for internet infrastructure providers like f/b and GOOG are far cheaper and far easier than for a content provider. Moving to the income side of things, the majority of websites (indeed in all the sites I’ve listed so far) get their income from ads. These ads are displayed in a number of places; in search engines like google they’re along the top and sides of your page. They also may or may not be bumped higher in the search results, depending on the algorithms that the search engine provider uses. These ads generate revenue in one of three ways, normally: Cost-per-click, or CPC: The advertiser pays the website whenever a user clicks on the ad. Cost-per-action, or CPA: The advertiser pays when a user takes a given action (submits a valid e-mail, say, or makes a purchase). Cost-per-mille, or CPM: The advertiser pays a set rate for every 1,000 individual page loads the webpage gets. As a rule, the more stringent your criteria for payment, the higher your payment will be. Hence, my generic CPM ad might only cost me $5 per 1,000 views, whereas my CPC ad costs me $2.50 per click, and my CPA ad might run as high as $15 or more, depending on the action. A websites revenue is determined by: User base x click-thru rate (what %age of people click ads) x average payout rate per ad. Increasing any part of this equation will increase your revenue. Increasing your userbase is the thing that f/b gets so much attention: theirs is growing quickly. However, people are speculating as well that due to all the proprietary information facebook has on their userbase, that they will be able to increase their click through rates via more targeted ads. This also means they can start employing higher-payout ads because they’re more sure that they’ll get enough clicks to make them worth it. I’ve got my doubts about f/bs click through rate - see my first post. There are other ways to make money online, of course, but what I’ve outlined above is how the majority of profitable websites make money. GOOG has made a better mousetrap because they simply don’t need user-specific data in order to display highly relevant ads to you; they simply know that based on your search term (“why is my weiner so small”) what ads they should show you (“30 day trial of enzyte!”). They are so good at this because they have trillions of searches worth of history to use as a predictor for what you’re looking for, and that number grows every day. Hence, their click-through and average pay rates for their ads tend to be damned good. Facebook supposedly should offer me better ads because I’ve put in things like my favorite movies, books, etc. However, their algorithms suck. So far, facebook thinks that I must be interested in “Rich Dad, Poor Dad” seminars because I’ve got finance info in my profile, and that I absolutely must be in the market for beer related t-shirts because my interests include homebrewing. Facebook’s built a better ad display model? I’ll believe it when I see it. Oh, also - 3rd party games account for a small but growing portion of social networking sites revenue. Here’s a nice piece on how that works for you: http://latimesblogs.latimes.com/entertainmentnewsbuzz/2010/02/how-social-games-make-money-lessons-from-farmville.html

Thanks supersadface. Your post was really helpful. I tend to agree with you with respect to facebook’s algorithms. I have never clicked on an ad on facebook because 1) I am not looking to purchase anything when I go on facebook 2) Their ads are not catching my attention with stuff that I may want to buy 3) I am too busy social networking i.e., trying to find sexy pictures of old girlfriends. However, I will say that I put limited information on my profile thus I am not giving them much to work with. Thanks again.

Also, wat time till the next big thing in social networking catches the fancy of people? There was orkut, then myspace and now FB. agreed that FB is much more superior but the valuation given to it is jus too much ! doesnt make sense . Btw great post @ supersadface

Returning to the thread’s topic: Extension of the Ethanol tax credit…should’ve at least eben lowered if not completely abolished.

I think Facebook is overvalued at 56B. Although I don’t understand much of their business model. I see less and less of my friends updating their status, something you wanna post you might not want a particular friend, co worker or relative to know. Facebook is a place for ppl to spend their spare time, it’s replaceable just like myspace, yahoo, cell phone and text still the fastest communication. Profits are not sustainable unless they can keep up with innovations.

Bravo ssf!

Bump, in light of Gold man sacks apparent endorsement of a $50b valuation on Facebook. Do they have an investment case or are they just selling access to HNWs that want to tell their buddies they own some Facebook? Hmmm…