Ford vs Facebook
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This is just the market saying "I'd rather see what Facebook can do with X billion than Ford."
Which on the face of it seems fair - Google had a similarly crazy PE when they floated. They grew into it pretty quickly though.
What I'm saying is it's not a basic value equation. Buying an asset does not create wealth. It's the application of that asset.
It's not simply Facebook has a book-value of X -- It's The market thinks Facebook can build more wealth with their $ than Ford.
Ford's is a capital-intensive business. That's what gives it hard assets that make its market cap 70% of assets (btw, the author totally forgets the liability side of equation - equity investors aren't owed assets - they are owed (assets - liabilities) - look at big banks, they have trillions in assets - but they have equally enormous liabilities too).
I don't know what investment opportunities Ford has, but regarding Facebook, I really don't think they can invest additional capital sensibly. An additional $1 invested in Facebook will end up being an additional $1 paid for some Instagram-like acquisition.
Furthermore, additional $$ spent on Facebook IPO stock will just end up an additional $$ in the founders' pockets.
Enterprise value in billions = market capitalization + debt - cash
Ford’s enterprise value = 40.4 + 100.5 - 15.2 = $125.7 Billion
facebook’s enterprise value = 90 + 0 - 1.5 = $88.5 Billion
See here for a post I did on this article: http://hackerscapital.tumblr.com/
EV should include debt at _market value_.
FB could just as easily issue debt in billions and I'd think that the market will be valuing it higher than that of Ford's for the same issue coupon (which just came back into the investment grade club after residing in the junk club for quite a while). FB would probably have a good income-to-interest coverage ratio if it ever issued debt so the discounting of its debt's cashflows would be less severe than that for Ford.
And, in any case, you cannot compare market values of two companies with different leverages such as FB and Ford without renormalizing earnings to the same leverage level. Earnings on equity are amplified if the company has debt (which Ford has). FB has no leverage - its unleveraged earnings give it a whopping market value of $95B. Ford can't even manage half of that figure with its $100B (!) of debt.
Edit: I am relying on your figures.
You can compare two companies with different levels of leverage. They both have Enterprise Value (EV), which is normally calculated as operating income (EBITDA to be precise) * a multiplier. Market capitalization, or equity value, is by definition the different between the EV and the net debt (debt - cash). (P/E ratios are usually not as useful as the EV/EBITDA approach for understanding a company, btw.)
One company may be highly debt financed and the other may be pure equity financed. As you say, debt financing supercharges equity earnings (see below), but this comes at a higher risk. And in principle, the higher earnings are balanced out by the higher risk and therefore enterprise value is unchanged.
What is a bit harder is comparing two companies in entirely different industries, like Ford and FB!
Equity returns are supercharged by debt because in a growing company debt coupons are cheaper than equity returns. e.g., say you invest $100 to build a company that makes $20 a year. You get a 20% equity return. But imagine you invest $50 and borrow $50 to build a company that makes $20 a year. Your debt pays a typical 5% coupon, so you pay 50*5% = $2.5 in interest. The remaining $17.5 goes to your equity and you get a 35% equity return. BUT if you're unlucky and your earnings are delayed one quarter, it's the bank that gets your 35% equity return cuz you bankrupt, sucka.
That's usually for freshly issued/on-the run or about-to-mature debt. It _used_ to be the case before the financial crisis that most debt traded near par - that has changed as the cost of repo financing has become disjoint of the risk-free rate since the crisis.
EV/EBITDA is the multiple to compare - as you rightly pointed out. A naive EV comparison, as done by HackerCapital, is misleading.
The description of leverage is also a bit simplified - typically, you would discount earnings with the weighted average cost of capital (WACC) = (cost of debt)(debt/EV) + (cost of equity)(equity/EV). So the discount factor does not simply "balance out" the leveraged (and volatile) returns - it depends on the relative cost of debt vs. equity _and_ the leverage ratio.
It's in the (cost of equity) factor that you can normalize different sectors as (cost of equity) = risk_free_rate + historical_beta * (sector_return - risk_free_rate). Sector return would typically be from a benchmark equity index specific to the industry - whether tech or autos.
Those debentures are usually used to finance pension liabilites. I am not sure if corporates are still issuing debt with that kind of duration anymore after the crisis :)
Users, pageviews, etc, are assets. If the market will be able to determine their "correct" value... that's another question.
Ford vs Google might be a close one in terms of IP - hard to compare across industries though - but vs Facebook it's quite one-sided for Ford.
Tell me that's not an asset. A single company has lots of information about and can display advertising to an eighth of the alive human race.
Then again, so does Google, I suppose.
...but that's it. They aren't building a physical product, they're going to sell other people's products. Or, sell information so that other people can sell other people's products.
I find it absurd that the market for web based adverting, between Google and Facebook and others, can be this valuable in the long run. These are advertisers, for crying out loud. People can talk about how many users Facebook has, but there are more automobiles worldwide than there are Facebook users.
What is worth more; a car purchaser, or a Facebook user?
Didn't that used to be true of MySpace?
Whereas Ford faces very real, present competition in a market full of extremely competent players.
Also it's good to note that their are companies being built on top of Facebook. Zynga is an obvious one but there are many smaller game companies, ad companies..ect and Facebook takes a cut of all of these
You're talking like the answer to this question is obvious. People will keep cars for 10 years, and they're as likely as not to get them from Toyota instead. At this point, Facebook is probably making a little bit of money (indirectly from Ford advertising) from that car purchase. Not as much as Ford, sure, but Facebook extracts a little bit of revenue from many, many consumer transactions.
http://www.wolframalpha.com/input/?i=how+many+cars+are+on+th...
http://www.huffingtonpost.ca/2011/08/23/car-population_n_934...
All that leaving aside the fact that car companies build other things, like heavy equipment and military vehicles.
If anything, that brings FB into a whole new realm of risk. Combine this with the fundamentals ( or lack of ) and it seems better left untouched.
The "dot-dot-com" era?
Historically for internet based companies this metric on average has been very low especially when put in comparison with the auto industry.
Where Facebook will be in 5-10 years is just about anyone's guess.
It is paying a twenty cent dividend on a stock price of about $10.
Cheap. Plus its making cars that are very competitive.
I do not use youtube.
Thank you.
Mullaly is indeed a charismatic CEO. He ignited the culture in the company. Going as far as giving engineering the tools and respect it deserved.
The old Ford was run by accountants. It is now more balanced.
Isn't it incredible? How one of the oldest startups in the history of the U.S.A. has managed to come back?
I wonder what might happen, if it could happen that the EU or US FTC mandates api access into and out of Facebook, perhaps after a decision that 2015 Man will use social networking as a needed public infrastructure, to be provided on a common carrier like basis.
Can the sheer size of Facebook's network trigger monopoly break up? Or the sheer size combined with lack of API access?
I just clicked on "Start my archive", Facebook will email me when they are done zipping it up.
This doesn't happen if the raiding company can't put together enough money to make the purchase, or if not enough of the stock holders are willing to part with their shares.
Although there probably is some way to siphon off the assets and default on the debt without committing fraud.
PS: Actually it's not so simple - when the company is highly leveraged, existing bondholders often do have a say in future financing decisions of the company.
The key to understand this madness is so right in front of our faces, that we can't even see it.
Due to the dynamics/nature of the market, stock investments seems to be more about a gamble today, and you can't gamble on Ford too much except for it to go down.
Forget trying to spot the value. It's all about what's hot.
Hence Facebook is getting crazy valuations.
Sure, fundamentals are what a lot of people base their buying or selling off of, but what's "hot" is all that matters just like it always has. Maybe a company just crushed their numbers for the quarter or a drug company attained a new patent; and while that may contribute to the true value of the company, when it comes to the stock price nothing matters except how many people buy.
Ford is a capital intensive industry that reminds me of Berkhire Hathaway - the textile company that Warren Buffett could never figure out how to make money from. It has competitors everywhere making relatively undifferentiated products.
Facebook on the other hand, is more like a media company. It has 1 billion eye balls who spend an average 30 minutes a day on its site on user-generated content. If you were a TV station, how much would you be valued at with that kind of metrics? FB has a beachhead in the sense that it is a marketplace of users who create content, and users who view them. This makes it incredibly sticky and also difficult for a competitor to come about. The downside with FB is that audiences can be fickle. If they think FB is a fad, they will start leaving. Therefore, FB had to establish itself as a habit-forming medium, like e-mail, so that people constantly reengage with it.
The problem arises when that growth occurs but instead of the price now being reasonable at those levels, it increases further...which is probably what it's going to do.
I have no idea what the thing's worth, but I cringe when I hear people talking about how they're sure it's a good bet because of some X which is almost certainly already priced into the market.
But there is got to be a catch.