Why Twitter Is Massively Undervalued Compared To Facebook | Hacker News Reader

Why Twitter Is Massively Undervalued Compared To Facebook

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36 pointspathik48 comments

I would make the argument that both Twitter and Facebook are massively overvalued, only Facebook is much moreso.

I'd want to see a solid revenue model that produced tangibly large profits for both of them before I'd stop being skeptical about their valuation. So far, I only see speculation, and given the effect of speculation in other, more tangible markets, I'm extremely wary.

Facebook's revenues this year are expected to be in the neighbourhood of $1 billion (http://www.insidefacebook.com/2010/06/22/exclusive-discussin... ), a near doubling from last year. Given that, their current valuation is totally unsurprising.

With $1 billion in revenues, that puts their valuation at over 33x their revenue. And their operating costs are also off the charts, so that's where questions about profitability come in, since investors expect to be rewarded at some point.

You might be interested to know that Facebook is turning a profit, and has done for a while.

Yes, but most high growth publicly traded companies trade at 20-40x earnings (profits).

Now Facebook has grown tremendously year over year, but this growth has to stop. They already claim 500M active users which is about 1/12th the world's population so their user base is really close to some maximum (3B?). How much higher can their profits actually go in order to match their current valuation?

I don't disagree with that, however, their profits have not kept pace with their valuation, and their first profitable quarter was only last year. Furthermore, they've taken a huge amount of venture capital in order to get to this point, and have had to get more at points for increased infrastructure costs.

I often read this "Facebook is turning a profit" but could someone point me a reliable link where to read more about this?

Or at least, does anybody know how much are they making profit?

Their were a bunch of articles late last year where they we're claiming that they were cash flow positive

http://www.wired.com/epicenter/2009/09/facebook-makes-money-...

This has been conflated with profitability. (Not that its too different)

That's a pretty poor price-to-sales ratio, based on stock valuation theory. I guess people (again) believe that traditional metrics don't apply to dot-com companies.

Which worries me. I lived through the first dot-com bust, and I'm not interested in living through another. I'd much rather see the industry take a much more conservative approach to economics than giving way to an irrational exuberance.

Now, personally, I agree all this is irrational exuberance. But, I don't see it as a huge problem. As far as that goes, I'm not sure the first .com bubble and crash was really a bad thing for the industry. (the first .com bubble and crash were very good for me personally, even though they were clearly mis-allocations of capital from a societal viewpoint.) Huge amounts of infrastructure (software and hardware) was constructed. Many new Engineers were attracted and trained. (of course, it was bad for those who didn't make the cut during the crash, but it was probably quite good for the industry as a whole)

Sure, some speculators are going to get soaked... but that's what happens when a speculator is wrong. I don't see that as a bad thing. Capitalism is based on this idea that speculation is fine; it's just that if you are wrong too many times, well, you can't speculate any more because you don't have any more money.

I know that I personally am rather jealous of Zuckburg. I don't feel he "deserves" to be that rich, but eh, that's not mine to decide. He certainly has more of a claim to that money than the CEO of Enron or GM, you know?

Sure, we're mis-allocating a lot of capital. But you know? the capital is coming from rich speculators, I believe, as it's so goddamn difficult to IPO these days, and a bunch of it is being used to prop up Engineer salaries, so while I recognize that it's an inefficient mis-allocation of capital, it's a wealth redistribution over which I certainly won't shed any tears.

Personally, I think this wealth redistribution from speculators to Engineers will continue this trend towards more realistic and more efficient Internet businesses, as more of the speculators are replaced by Engineers who made it big in the last boom. This is, after all, how we got Paul Graham and Ycombinator.

So by your estimation Google is also overpriced? Google's first year as a public company their P/E was around 100 ($193.85 at $2.07EPS), if Facebook IPOs at 33x their stock is a bargain in comparison (if you believe FB has the revenue growth potential of Google, as many do)

EDIT: oops, I pulled revenue not earnings. Its irrelevant in any case. By the time Facebook IPOs their earnings should be on par with Google's IPO earnings.

Google grew the market for click ads. Facebook entered a big market, but shown itself to have poor click-through rates. It also has high costs. It might find some new market (selling marketing not sales - banner ads rather than clicks), but it will take years to grow its market.

I think Facebook is basically a photo-sharing service, and a host for Farmville (at least, in terms of costs). Photos aren't getting smaller, unless they find some revolutionary compression technology. Hard drives aren't getting much bigger, though RAM and SSD drives will help. Hosting lots of photos (which is the real reason people stay locked-in - it's too difficult to upload their libraries to another network) is not a cheap business.

Facebook doesn't get search traffic. People aren't looking to solve a problem (and possible buy something), they are looking for a friend from high-school. There's not click-through in that.

Sales (click-throughs) is reportedly poor if you do it in Facebook. What about marketing (banner ads)? They can research how people change their "likes", which gives advertisers some data on how a marketing campaign worked. I'm skeptical though - people aren't on Facebook to shop (look at how their marketplace is going), and they'll just ignore the ads. Besides, it will take a long time to develop the model, convince marketeers to use it, and then wait for the market to grow.

You're right about Facebook not beating Google in click ads, but they have the potential to tap into a much larger market. Brand advertising.

Facebook has all the information and the amount of attention that advertisers are used to spending on TV. Age, sex, location, and interests (in real time now with Facebook 'Like') are all quantified, and at a much deeper level than TV advertisers have access to. TV spend itself is a $60B/yr market, brand advertising is a $600B/yr market. Its not a model that will take a long time to develop, large brand advertisers are already doing significant spend on Facebook, Davide Grasso, Nike's chief marketing officer, says Facebook "is the equivalent for us to what TV was for marketers back in the 1960s. It's an integral part of what we do now."

This doesn't even include Facebook's ability to move into commerce on the platform with Facebook Credits, or to leverage the myriad of other opportunities their market position presents them with.

See this:

http://news.ycombinator.com/item?id=1798951

Can you please be more specific where you say costs are 'off the charts'?

Culling together various information, we're looking at approximately $100 million a year in new hardware, $20 million a year in leases. They haven't given out numbers for labor, bandwidth and energy (all huge, I'm sure), though there's plenty of articles talking about Facebook's costly infrastructure in the abstract.

This is simple to explain, Facebook isn't anywhere close to its revenue potential, many people think it has the capacity to make Google type money as brand advertising moves online. If you look at their stock price in that light its not overvalued at all. Google's 2004 P/E was around 100, even in 2008 it was 46.

EDIT: oops, I pulled revenue not earnings. Its irrelevant in any case. By the time Facebook IPOs their earnings should be on par with Google's IPO earnings.

You're conflating revenues and earnings. Their valuation is at 33x revenues. Their P/E right now is likely somewhere in the hundreds.

The most information we've gotten about profits is that it's in the "tens of millions". Now, to make the math easy, let's say they have profits of $33 million. That puts their P/E ratio at 1,000.

You're right, mixed that up. However, I'd be willing to bet that by the time Facebook IPOs their P/E will be lower or equal to Google's P/E at the time of IPO.

How about an explanation instead of just downvotes. This is a totally reasonable statement given FB revenues (yes I know this is not equal to earnings) compared to Google's in 2003.

Twitter doesn't get a billion organic searches a day, so his numbers are far off into fantasy land. That number (if valid) counts all the auto-refreshes ("X new tweets"), trend browsing, API access from apps like TweetDeck, etc etc. Google makes so much per search because people actually sit down and want to find out something.

Having an auto-refreshing search for your company name that generates hundreds of searches a day isn't going to ever bring a dime of revenue in for Twitter. To get realistic numbers you'd have to first find out how many real "I want to find" searches are happening and then see what they are searching for. If I'm typical, the search traffic won't be super lucrative.

BREAKING: Twitter investor asserts that Twitter is undervalued.

To be fair, if I thought Twitter was undervalued, I'd probably be interested in investing in Twitter as well.

And after investing your interest would be the perception that Twitter is undervalued...

His arguments are either valid or they aren't. You should engage them on their merits rather than worrying about ulterior motives.

Pretend the person you respect the most wrote that article. How would you critique it, then?

The author argues that the 'interest graph' is more commercial than the 'real friends graph'. True. However its clear to me that the 'real friends graph' is much more useful to real people. Facebook's 'real friends graph' is a useful tool, helping me keep track of people in my life. The 'interest graph' is a much less useful thing.

I don't think the authors would argue with you that a friends graph is more useful to real people. I think the theory is that an "interest graph" is more commercially valuable. If you follow Apple, you're very targetable. If you're friends with your college buddies, you are not.

I think Facebook realizes this-- which is why you're seeing them offering "like" buttons, share buttons, embeddable commenting functionality, etc. I honestly think Facebook is doing as good a job as Twitter at capturing interesting nowadays... And for a broader audience.

Yes I agree. My point is that just being a intrest graph service limits the service to the early adopter tech crowd. Facebook are in a much stronger position as (normal) people are there already with their friends, and they can grab the interest graph as well.

I'm skeptical that Twitter "lends itself brilliantly to commerce."

First, Twitter pulled the plug on their @earlybrid project (http://twitter.com/earlybird). I know some companies who ran deals through them and they produced disappointing results.

Any story about why the future of Twitter is commerce will have to account for that.

Second, there have been major changes in online commerce over the last three years, most obviously with companies like Groupon and Gilt.

Commercial activity on Twitter seems a little "tabula rasa" right now. There are companies out there actively changing the ecommerce landscape. Twitter has massive usage, but it's ability to augment commerce is still a promise.

Facebook has had a much bigger impact in online commerce. Facebook Credits are going to be everywhere. You can already buy them at Target, or whatever.

Groupon's marketing spend was dominated by Facebook ads for a long time, and they (along with Zynga) more than doubled the CPC for Facebook ads over the last two years. There are two $1Bn+ companies built right off the back of Facebook.

What's the biggest company built on Twitter? I can't think of a single interesting one.

The sociology of Facebook doesn't support "commerce" in the sense of making FB posts about things you've bought, but I don't know that Twitter does either. So we're talking about monetizing things indirectly, e.g., running ads targeted against their "interest graph." What Zynga and Groupon did were essentially find a better way to monetize Facebook users than Facebook itself had, and acquired those users by paying Facebook for the privilege.

It all hinges on Twitter's advertising product. We'll see how compelling it is and if someone can build a Zynga or Groupon on top of Twitter the same way those companies were built on Facebook.

I am not really sure twitter is undervalued actually, compared to risk. I believe it has potential to be huge, but they haven't cracked the revenue nut. I believe a number of smart minds including Naval Ravikant and Adam Rifkin believe if they "get it right" they can be worth much more. I agree with the potential of twitter, but I don't believe they figured it out yet. It's their current value vs risk that they'll figure it out. Facebook on the other hand is bringing in revenue with a lot of potential to bring in a lot more.

I totally agree with this. Twitter has created an entire communications platform, and its potential for business and monetization is only getting started.

Whereas maybe 3-4 years ago I spent a bunch of time on Facebook, nowadays I find myself spending all of my time on Twitter because the people and interactions there are so much more valuable and interesting. You don't need to go to news websites or blogs anymore - all of the content comes to you.

Surprised to see all this anti-Twitter sentiment on HN.

Does anyone here use twitter? Can you explain how and why?

It takes a while to find a use. Originally, I thought it was just the status feature of Facebook for people over 35, so I was wondering why everyone was so excited about a limited feature set. I've definitely come around. I don't think everyone uses it the same way, but I'll rhyme off a few uses I've found.

1 - Replacement for RSS. Follow the blogs you do on RSS and get push notifications of updates. Authors sometimes have smaller things to say than a blog post requires, so the feed acts as an added feature.

2 - Follow the doings of "niche celebrities" like Eric Reis and PG. They give advice and comment on recent events, but aren't really popular in the mainstream sense.

3 - Follow more general celebrities. It gives people you are a fan of a direct line to you independent of traditional media outlets. Think Conan when he was without a network, and Kevin Smith is doing some interesting things as well. Sure, Kim Kardashian has a huge following which she uses to hock products, but there is a massive audience who wants precisely that.

4 - Comedy feeds. I find when comedians have only 140 characters, the constraint makes the jokes more punchy. (plug: my traction deficient app http://laughlitmus.feedladder.com is trying to capitalize on this; viral loops are a bitch)

5 - Real time events. You'll hear about an earthquake on trending topics before any media outlet.

6 - Following privacy paranoid real life friends. Twitter has a dead simple privacy model. Either people can publicly see your feed, or they have to approve you. Some people I know got fed up with the Facebook privacy shell game and switch to Twitter for this.

7 - Connecting with a loosely coupled community. For those of us not in the valley, finding fellow hackers can be troublesome, and when you do, you don't really need a heavy connection, but following each other on twitter is a nice lightweight way to see if the local tech event is going to be hacker or muggle heavy.

8 - Location based chat for conferences. Hashtags allow for people to mark a discussion about anything, and a lot of meetups will tell you the recommended hashtag so you can see what people are discussing in a specific place.

I hate is the whole "Twitter is just people talking about what they had for breakfast" complaint, it really just meant you are following boring people. There actually exist a non-trivial set of people I know whom I am friends with on Facebook (and real life) but wouldn't follow on twitter because they're tweeting about stuff I have no interest in.

It's great for getting news about music and bands, and also connects you to people like that (large or small celebrities) in a unique way. Posting messages on Twitter takes much less time or commitment than writing a blog post, so I hear a lot more from and about my favorite musicians. Following humorists such as Steven Colbert is entertaining.

Twitter also hooks you into a social circle of your choice in a unique way. I've heard about all sorts of software projects, new releases, rumors, etc. from Twitter.

I have also used it as a place to post and broadcast messages about my businesses, and customers may see it appear in their feed if they follow us, or they can go to our page as twitter members or not and see the latest news.

I use twitter, mostly for, uh, "reputation management" E.g. twitter is a place that people complain about their interactions with companies. If someone complains about me on twitter, (or anywhere else, really... but twitter seems to be the place to complain about companies right now.) I try to make it right, or at least see to it that they get a refund.

I like reading amusing tweets like CEOSteveJobs. I figured the main drivers of it were breaking news via retweets, and finding ad hoc discussions of things via loacation or #tags. I don't have much to say myself though.

It is, among many, many other things, the primary way we get people to our monthly ChiSec meetups. It's also been a hiring vector for us. There's two uses for you.

Thank you. If you use it, why? When? What for? How is it actually "used" anyway? If you tweet, do you also ever read what's ... tweeted?

I found it very useful for following the Iranian uprising last year. Since then, however, I mostly use it for updates and promotion of my open source software project (Appleseed).

As for more intimate discussion, I've never really grokked how to use it in that way.

This article argues for potential. But for Twitter to be as high-valued as Facebook, it has to prove it can be adopted by average internet users. Twitter has such a potential, yet Facebook has already been achieved that.

When I recommend Twitter to my friends, it usually goes like this:

Me: Try Twitter, it is interesting. Friend: What can you get from it? Me: a lot of interesting updates from your favorite people and topics Friend: I already have enough internet updates. I shall pass...

The point is that average user only has several web sites on their minds. There much be a good reason for them to use one more web site.

if anything, twitter is overvalued...

I must admit that after reading the title I was not surprised to see the disclosure at the top that the article was written by someone with a lot of twitter stocks he's probably thinking of unloading.

Twitter is massively overvalued because it's a fad. Can you imagine Twitter still being popular in 5 years? 10? What long-term potential does it have?

facebook is making others(zynga) tons of money. twitter not so much. a company creating a new market, new ecosystem is much more valuable. what twitter does could be a facebook app. the converse is not true.

Twitter is adding value to companies for marketing purposes. What about the old spice stuff? Or various companies reaching out to users when they complain about a product on twitter? It's far easier for companies to do this via Twitter than Facebook.

Maybe the value added in that case is harder for people to measure, so it's being forgotten.

consider how many businesses are reliant on twitter.

facebook may have their hand all throughout the social graph, but twitter has given rise to an entire ecosystem that is not going anywhere.

just think about all the social media (AKA twitter) jobs that have been created!

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