The Companies Worth Less Than Facebook | Hacker News Reader

The Companies Worth Less Than Facebook

larrycheng.com

34 points_pius38 comments

It's important to note that stock valuations are derived from the expected future profitability of a company. Stock is a claim on future profits. Compared to a company like Halliburton, who has to build billion-dollar oil rigs before they make any profit, a technology company like Facebook is a lot more lucrative and thus its stock can inflate quickly if the profits expand faster than costs. And generally technology costs go down over time while profits increase exponentially. So you have a powder-keg scenario in Facebook if, and only if, they find a profitable business model based on their enormous userbase. And they better find that business model or the stock will crash like it's the year 2000.

According to their PR they have found such a business model and are now profitable.

"profitable" != dstein's "powder key scenario".

I will totally believe they are profitable, I do not believe that right this second they are bringing in enough to justify a $50B valuation on that ground alone.

History will tell whether this purported business model works out quite as well as their PR department promise.

As an aside, this article of Charles Ponzi makes for great reading ;-)

http://en.wikipedia.org/wiki/Charles_Ponzi

while stock valuations and expected future profitability are usually correlated (to some extent), if a company isn't paying dividends, wouldn't it be much more correct to say that stock valuations are derived from the expected future valuations of that same stock?

It's the same thing. If the company isn't paying dividends the stock price includes whatever dividends the company will pay out in the future. The value of the stock is the total value of all expected future dividends priced in today's dollars. And in Facebook's case investors think (or want you to believe) that the future profits will be pretty big.

I wonder what the Fortune 500 would look like if people were to guess at which companies were more valuable than others.

That's pretty much what the stock market is and also the Fortune 500. It's all people guessing as to the future guesses of what a company is worth.

I guess the OP's comment should be reworded "people who haven't put their money in it"

Thats the great part about a public market. Anyone may speak as long as they put their money where their mouth is. (Or conversely put their mouth where their money is, aka. talking your book)

Which is not the case with facebook. (not that I'm disagreeing with you)

I won't buy this until FB goes public and we see how it fares in an open market. Though I won't argue against the current valuation, I'm not sure I believe it yet.

Facebook shares are being traded quite a bit now. YOu could call it a semi public market.

"Public," in this case, I believe, includes the need for them to disclose earnings reports.

Wow... neat list. FB is not more valuable than BMW, AIG or Nokia. There's just no way. And if it turns out that they are, then something is fundamentally wrong.

Why? I barely use facebook and it's more important to me than BMW or Nokia, and AIG should be out of business (but that's another argument). I assume facebook is more important to most people than BMW or Nokia, and though the value may be less per person it could be easily be more in aggregate.

I would think that hundreds of years of engineering (mechanical and electrical) and solid products used all across the globe would be more valuable than a social website, but maybe I'm wrong.

You are presuming the stock market is somehow fair.

Yes, you are right. I was confused. BMW engines deliver pigs to markets so people can eat. One can buy and sell virtual pigs on FaceBook by playing Farmville.

To me, actual bacon is more valuable than pretend bacon.

How "important" work is is only one factor in the creation of value. How much you produce, how it is valued by other people, what your margins are, what your future revenue streams will be -- these things are all factored into company value.

There are many companies that make non-essentials that are valued more highly than farms and utilities.

Exactly. Not to mention the fact that facebook is near monopoly status. If you were to add every single car manufacturer together, surely you'd get a much high valuation.

If the social network space were as diverse (in terms of relative player weight, not total number of players), we wouldn't be having this discussion.

Facebook's valuation reflects the value of the social-networking market perhaps more than its value as a single business?

Still it's hard to say that a company that makes well under a dollar a user is worth more than someone with a profit margin of many thousands on each sale. That said though a lot of the companies I know on this list will probably face game changes in their industries soon.

I would think that hundreds of years of engineering (mechanical and electrical) and solid products used all across the globe would be more valuable than a search website, and I would definitely be wrong.

You could easily argue that about a hundred years of engineering have gone into computer science, and many, many more than that into mathematics and algorithms. And this is the stuff that Facebook is built off of.

Also, Audi is certainly not the only player in town when it comes to automobile makers. On the flip side, Facebook has hardly any serious competitors right now, and no one seems likely to catch up any time soon.

If we're using cars as an analogy, Facebook has basically created the Model T of online communications, and it will take a while before other car companies can come along and steal market share.

Wouldn't that sound like a sweet deal if you were an old and not-so-tech-savvy investor?

Isn't that simply debasing the value of all internet and software technology companies, then? None of them are older than BMW, and none of them make engineered steel products. Yet, I'm very sure that more people use Facebook and, say, Windows, than own a BMW.

But the people that use facebook pay facebook $0

The people that use BMW pay BMW $50,000

Lose money on every customer but make up for it in volume is not a sustainable business model

Somehow I highly doubt facebook is losing all that much money, hence their valuation.

They're making it up on volume ad sales.

... aggressive use of basic arithmetic is required to understand Facebook's model compared to high cost, physical goods.

If Facebook makes $.10 in advertising off 500m people a month, and each person costs $.05 to serve, that is $25 million / month.

If BMW makes $50,000 / car but only sells 1,000 cars a month, and each costs $25k to make / ship / sell then they are only making $2.5 million / month.

Clearly both companies make more than that, but this is an illustration of how selling high cost goods might not be as profitable as a website used by 10% of the world.

Facebook has revenues of $500M/year - which allows them to be cash flow positive, no word on how much profit. To be worth $50bn, 100x as much, it needs to find 100x as many users or earn 100x as much per user.

BMW has $50Bn of earnings for selling 1M cars/year to make twice as much it simply has to sell 2M cars

Citation for Facebook revenues? Recent rumours have it at ~$2 billion.

One of the major component of stock valuation is the expected growth of the company, which somewhat accounted for market and internal 'risk'. However, I would argue that in Facebook's case the risk is higher than what is used for this valuation. Therefore, I do not see Facebook being worth more then say Target.

I thought EMC bought VMWare?

They did, in 2001.

Market cap / valuation comparison is only meaningful if you compare companies in the same industry. For example, priceline.com has market cap of about $21B. In that respect, facebook valuation is not so high.

Umm, no. Exactly the opposite. If the market caps in one industry were wrongly valued relative to another, then investment would move (b/c there would be opportunity for arbitrage and profit).

Why did you think the economy was divided into separate and unrelated sections?

Facebook should use the same brilliant strategy that AOL did, and buy out a clearly sustainable big name company.

Maybe BMW, how about that?

NewsCorp?....well it is final....Facebook won

on paper of GS & DST analytics they certainly did

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