Hacker News Reader

Comment by michaelchisari | Hacker News Reader

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.

View on HN

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.

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.

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

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)

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?

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.

See this:

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

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.

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.

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.

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.

Reply on news.ycombinator.com