FB down 8% at opening
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The P/E ratio[3] is: market price per share / annual earnings per share
This basically means that Apple makes as much profit as their are valued at in 13.12 years, whereas it would take Facebook 107.66 years to afford to buy themselves.
That doesn't make any sense, and if we assume that their P/E ratio should be roughly the same, their stock price should be around [4] 33.54/(107.66/13.12) = 4.09 USD
Edit: Google's P/E ratio is 18.32, and if Facebook were to have the same P/E ratio its stock price would have to be 5.71 USD [5].
[1] http://www.google.com/finance?q=AAPL
[2] http://www.google.com/finance?q=NASDAQ:FB
[3] http://en.wikipedia.org/wiki/PE_ratio
[4] https://www.google.co.uk/search?q=33.54%2F(107.66%2F13.12)
[5] https://www.google.co.uk/search?q=33.54%2F(107.66%2F18.32)
Facebook sells ad space to people on their chat platform that have little to zero intent to buy. The last time I saw a company (AOL) try to stuff ads in a chat client... well we all know how that went.
Facebook have a shitty ad product and it still generates $4b p.a and climbing, imagine how good they would be if they actually figured this stuff out
Please also consider a counter case, what if $4b revenue i.e. roughly $4 per user per year, is the best you can have for such a product. And the potential for growth of no. of users is not high, then what?
But... how is facebook any different? They have ads. And... more ads, as far as I can see. What's the "more than one" source of revenue you're referring to?
Normally you talk about diversification in the sense of risk management: i.e. "It's OK if the social media market tanks because we still sell phone service." (or whatever: hardware, concert tickets, coal mine permitting services, etc...).
From that perspective, both Facebook and Google are very exposed. Though if anything I'd still say that Google is better situated due their presence in pretty much all of online advertising. As long as there is anything worth advertising to someone on the internet, Google has an answer for that.
HW: Google Search Appliance, Google Nexus SW: Google Earth Pro, Google Sketchup Pro SaaS: Google Docs for Business, Google API's (Maps, Google+) Paas: Google App Engine Ads: Google Ads
I know that 96% of GOOG's 2011 Revenue came from Ads, but GOOG is at least trying other markets. I personally wouldn't be surprised if FB released a phone.
The PE works out to be so high because there is a growth expectation from Facebook's one billion users. All that it says is that the market believes the chances that Facebook will be able to grow revenue, and in the future, profit, is very high.
PE is not an accurate indicator of the value of this stock. PE is used to compare mature yield stock, the type that all those Warren Buffet books talk about. With Facebook still being a young company the numbers to track are revenue growth and price/revenue.
Just to pick a nit. To date Facebook's P/E is high because Facebook said so. Facebook's value has never been set by an open market until about 3 or 4 hours ago.
Its P/E isn't mean to be an indicator of value, its shows the markets expectations of growth. And I think a lot of people are interested to see if the "market"'s expectations are inline with their own - and to that end P/E is great.
Not an open market, no, but a market nonetheless. Anytime a company takes a funding round, whether from a single incubator or a dozen VCs, the transaction implicitly prices the company pursuant to growth expectations. (And that's not even mentioning Facebook's heavy trading in SecondMarket.) Just because a market is restricted and low-volume doesn't mean it doesn't exist; any time a transaction occurs, you'll find a market behind it.
For your purposes (comparing valuations between two companies), it would make more sense to compare market caps.
Think about it in your head with an imaginary company with 1, 2 or 4 shares.
I wouldn't be surprised if Apple's EPS growth outpaces Facebook, but these numbers are completely meaningless until you at least make a stab at adding in projected growth.
I'd be more than happy to know "your" expected growth rate. Facebook has not disclosed its business plan, views on the online ad market, ongoing capital expenditures and working capital needs.
Who's failed to provide future growth information is Facebook, not the other way.
More importantly, the Tech audience keeps looking at P/E as a valuation metric, but what rigorous and top asset managers do is look at Free Cash Flow to Equity, not Net Income. On a FCF to Equity valuation, FB IPOed at +220x.
Even at a generous P/E or FCF/E ratio of 25x, Facebook's Free Cash Flow needs to go from $450m to $4,000m in the next 24-36 months. Do you think that is possible? After looking at their infrastructure needs I think not.
I think it's you who has failed in the calculations.
Only if their earnings were constant for the next 107.66 years. People expect Facebook's earnings to continue to grow. Apple's earnings, by contrast, are considered mature.
They may continue to grow or they may tank. People are betting for the former, but so far with very little real knowledge of what they're doing.
Tech is usually fickle and high-risk, but Facebook is in a league of its own.
Was it not obvious in advance that FB was being priced such that the shares would be either flat, or decrease? The original investors have made themselves a fortune - and frankly anyone who invested heavily in a corporation at a P/E of 100:1 didn't think about it well enough.
From listening to Zuckerberg I think he's a true capitalist, more interested in creating long term value than making a quick buck. I'm sure he's not excited that some very hopeful people who believed in his company are hating him right now because his stock (temporarily) seems over-priced.
Certainly, most future growth will come from extracting more cash from the pool of users (or people selling to them), not growing the pool.
The world economy has never seen anything quite like Facebook before -- that's why it's so exciting. They could become Google/Netflix/LinkedIn/Zynga combined. I'm not saying they will, but they've got the prerequisites: 1 billion active users.
Or they could become the next AOL/Myspace/Friendster/Ning combined... (IMNSHO, that's at least as likely as the former).
There is a fairly strong chance they will own an enormous % of market share of ALL online and mobile display advertising in the near future.
They certainly can't expand the user pool by that much, which means that they need to find a way to monetize their existing users more effectively. I think that Facebook can certainly make more/user than they currently are. $5, maybe $10/user is possible. But $100? I don't think so.
So then are advertisers willing to increase their FB advertising budgets exponentially? Does FB have something coming down the pike on a regular basis to make that happen?
http://venturebeat.com/2009/03/19/the-worlds-most-lucrative-...
That doesn't sound to me like a "proven revenue model" to support a $104B company with exponential growth.
As Facebook figures out more ways to be a more pervasive force in people's lives, they'll have the ability to multiply the revenue they receive on a per-user basis.
I don't, however, think it will ever live up to the price they floated at. I suspect that Facebook will be a successful company worth about a third of what they launched at.
Zuckerberg et. al. did pretty well out of this.
Zuck's net worth may have dropped 10% this morning (depending on how many shares he sold yesterday).
I'm talking about the money Facebook made off the IPO shares, not the net worth of Facebook employees.
> Zuck's net worth may have dropped 10% this morning (depending on how many shares he sold yesterday).
Changing the IPO price wouldn't have changed that. If they'd opened at $15 and popped up to $35, Zuckerberg's net worth would still be the same as it was when it opened at $38 and dropped to $35... but Facebook itself would've gotten much less money out of the IPO.
So their "buy" price as already set and their "sell" price was going to be set by the market anyway.
This is the only time FB can set the price. Any later sales of shares will be market priced.
Basically, Morgan Stanley convinced a whole bunch of its most favored clients to buy a stock at $38 that was worth only $33 or whatever. Those are the people who got "ripped off", so to speak.
You don't understand the greenshoe: MS didn't spend a dime. That money came from selling initial shares from the "overallotment". Essentially, suckers who paid too much.
If the price had stayed above the IPO, that money would have gone to FB. Since it dropped below, MS is plowing the money (on behalf of FB) into manipulating the share price.
Edit: My more detailed explanation here - http://news.ycombinator.com/item?id=3996536
The people on the wrong end of the deal are those that bought Facebook shares pre-IPO or in the hours after the IPO. The people on the right end are all early Facebook investors selling shares and the underwriters.
Zuck has built a valuable company - its just not $100B valuable. But a $25B company isn't peanuts.
FB scored a win by getting $100B, but in my opinion it's tainted, and they may have poisoned the well for those who follow.
Funny thing: All IPO's are priced by the sellers. If they get it right, all of them should have prices which then stay flat or decrease. It is the buyer's interest for the price to increase, a fact that seems to have been forgotten since the bubble V1.
Maybe now people will again recognize the IPO for what it is: A company begging for money.
The investors will cash out, but they'll gradually release the stock to the public.
The problem is that the sheer number of shares that need to be bought won't have enough humans in our population to buy it at the price. So you're going to see this stock gradually tank as investors dump their shares into the public.
It's really a legal ponzi scheme - Facebook only makes less than 1B in real revenue and their cap is riding at 90B and falling.
http://www.businessinsider.com/exclusive-mark-zuckerbergs-se...
I don't think they priced it right, a $30 sell price could have created a 13% bump today, a big gain on opening day can create demand from retail. It changes the whole story, Facebook should know well enough the social effects of perception, even though the fundamental story is the same. The idea is not to cash out on IPO day, it's to create a story of growth and success and then cash out a few days later as the growth has whipped investors into a frenzy.
It reminds me of my realtor who would put houses on the market extremely underpriced generate huge amounts of interest. A bidding war would ensue almost immediately amongst those emotionally attached to the 'great deal'. After the bidding war the seller would have an offer 25 to 30% higher than market. The internet equivalent is $300 ebay items listed for 99 cents. Facebook fucked the IPO up by failing to generate interest through a success story, it will recover though.
Honestly, if you're 'investing' for two days you're not interested in P/E but rather technical analysis and market sentiment, both of which are poor right now, as nothing fundamental about Facebook's business has changed in the last week.
On the other hand, if they sell the stock to the public at $38 and it drops down to $34, it's someone else that's out the $4. Sure, it may create some temporary negative publicity, but, as you stated, they will recover.
If not those shareholders may also want to exit shortly after the IPO, creating a success story for the IPO should increase demand creating a better market for shareholders.
I do agree with you that in a market with rational agents and solely from the POV of Facebook, Inc. that they did the best thing, but I think in a market filled with irrational agents motivated primarily by price movements that it creates the wrong story for the next 3 to 6 months in the overall social context.
What they've created is dinner conversation about how Facebook is flopping and has provided lots of ammunition to the nay-sayers, rather than 'proving' the nay-sayers wrong.
I tend to see Facebook's business fundamentally as hype, people use it because other people use it, not because of some intrinsic thing that makes it better than any other social network. It's moat is it's userbase not it's technology.
It's like Coca-Cola, people drink Coke because other people drink coke, not because it tastes better than Pepsi. It's the fundamental reason why New Coke was a flop and Pepsi taste tests don't matter.
The attitude expressed in your comment is really disturbing.
It seems like people are investing in what other people will be willing to buy this otherwise useless stock at, and those people are only willing to do it because of yet other people willing to buy it for the same reason. Is that not correct? Seems like an extremely bizarre form of "investment", it's betting on a horse, not owning a portion of a horse.
Different situation. Pricing the IPO lower (as others have pointed out) would bring less money to facebook. And of course in the case of real estate there is no obligation to sell even if someone offers the asking price or even over the asking price.
Facebook is in for the long haul. This IPO gave them a hefty bit of cash - we probably won't see the results in full for years to come.
Second, facebook stock is already priced at a level where it's expected they'll be taking in a huge percentage of total worldwide ad revenues. Where can it go up from there? There isn't much reasonable headroom there, which makes it a very poor stock to hold on to.
I remember having a discussion with another programmer friend of mine, after the Google had had their IPO. At the time the friend was working in the networking software area, and had not much clue on the Internet side.
The topic was Google vs. Microsoft. I was telling him that Google is going to beat MS. His response was but Google is just search!
Anyway, the reason I mention this is that for GOOG IPO, some very smart Alexes of the world were not cued into to the buzz. Apart from Internet enthusiasts and professionals.
Now move forward Facebook IPO. The other day, my young, just-out-of-teens, female cousin was announcing on FB, that she has pre-ordered some buy.
To cut the story short the fools were already in !
PS: Not to disrespect my cousin. Using the 'fools' word in the context of those famous sayings regarding fools entering the market, just at the time of the bubble
Ads work better when I know a lot of specific things about you. As much as people post on Facebook, I have a hard time believing that Facebook knows much more about people than some locations and general demographics.
And this is why Google+ is so maddening. They have no clue how to build a social network and they aren't even trying. The people who use it are mostly techies who use it as their third social network after Facebook and Twitter. Circles was a neat idea, but wasn't promoted sufficiently. The vast majority of the time I personally use Google+, it's for the hangouts, which are great. But even that part of the site is fragmented. There's hangouts (which has the most features), and hangouts with extras (which doesn't, but you can name a hangout and keep a static link).
Meh. The state of social networking is very much up in the air right now. Seems to me that there's a lot of value being wasted by not appreciating what people actually want, and turning that into value.
Small businesses/startups on Dragon's Den get laughed out the room when they try and broker a price based in part on the 'potential' of their business. Why is it different for Facebook?
http://www.bothsidesofthetable.com/2011/12/27/should-startup...
It must feel terrible to be underwater the day after IPO, if that's the case for anyone. I was at Amazon after the dot com bubble burst, and it was very hard for managers (who mostly had already done very well) to keep morale up amongst the later hires.
Of course, the people who stayed are all doing quite well now -- but it took a decade of patience.
Everyone's looking at Mark Zuckerberg right now. If his team continues to execute at the pace of a startup the stock will go higher. However, if he starts to show signs that the pressure is getting to him (think Google's failed attempts at social or Nflx's Qwikster snafu or the past 10 years at msft) the stock will fall.
The technicals don't look good either.
For a few weeks, anyway.
LinkedIn has maybe 23 million active users. [2]
[1] http://en.wikipedia.org/wiki/Facebook [2] http://www.quora.com/LinkedIn/How-many-active-users-does-Lin...
Time will tell. What happened today doesn't actually mean anything in the long run.
The value placed on FB was absurd to the extreme.
In short, they were prudent.
FB did the exact opposite.
They also have over 50% of voting control with one person so don't need to really deal with shareholders. The only single downside is employee option values and incentive packages.
Edit: to add to that, there is also a strong school of thought amongst investors that companies and CEO's who track daily, monthly, quarterly etc. stock fluctuations (ie. short term) are a lot less effective than those who ignore the short-term movements. Facebook said as much in their S1, and Zuck in his letter, that he won't be following the stock or dealing with the market, but will rather focus on building the company long-term.
Yes, this is much closer to my thinking and that's why I called you out on your argument.
So of course he wants the IPO price to be as high as possible, because that's the money he gets to put in his piggy bank.
In fact, the real goal of a public company is not to increase the stock price, but to maximize the value of the stock to shareholders. In some cases, this means maintaining a flat stock price but paying healthy dividends (in other words, giving some of the profits to the shareholders). This was actually the dominant model for many years (link below, take a look at the growth rate during the '70s and '80s).
The somewhat more recent trend toward increasing share prices is just another way of maximizing shareholder value. In this case, it is done by increasing the market value of the stock being held by the shareholders.
It is quite common for companies today to pay no dividends. Since the shareholders don't get a piece of the profits, the only way to make money on the stock is to buy low and sell high (or buy low and hold for awhile, perhaps until retirement, and then sell, however you want to look at it).
So there really isn't any intrinsic reason for a company to seek a higher stock price. The point is to maximize value, which doesn't always equate to price.
Of course that isn't going to cheer up people who hoped to buy FB on Friday and flip it for a huge profit this week after the "bump". But risk is the whole reason there's money to be made. Sometimes you win, sometimes you don't.
Disclaimer: I have never invested in any company, never bought any stock, so you may call me naive.
1) If their stock price fell off a cliff, there's got to be a reason. It could be basically anything, but it has to exist and be well-known (maybe Larry Page had a breakdown, shaved his head and tried to run down some reporters, whatever). The event that caused stockholders to sell (thus crashing the stock) probably would have been enough to cause Google's customers to ask questions, the stock price is then just incidental. It's a "chicken and egg" problem in some sense.
2) Stock price really doesn't have any impact on the everyday functioning of an otherwise-healthy company. Stock price is a reflection of the buying and selling happening on the stock market, so fluctuations in price can actually have nothing to do with the current health of the company in question. Maybe tomorrow a report comes out that indicates search-based advertising will start to decline next year and will be half what is today in 2020. This would likely lead to a decrease in Google's stock price. But it probably wouldn't lead to many companies dumping Adsense, at least not yet. A report about the future affects the stock price, but it doesn't necessarily affect the customers today.
Stock prices are abstract and largely disconnected from the actual company. So while a good CEO will pay attention to the stock price, it just isn't all that important for most (especially mature) companies. Building a healthy business is the important part.
However, FB Inc. is structured so that Zuck will retain a majority of the voting rights, even if every other investor stands against him (http://www.slate.com/articles/business/moneybox/2012/02/face...), so even if the price goes down to a dollar a share, investors’ only recourse will be to sell before it drops to fifty cents.
Would you stop Googling things because you read a news story about their stock price declining?
(Caveat: There's some economic work that models real-world feedback from irrational "noise" trading. If you're interested in learning more I'd start with Subrahmanyam & Titman's 2001 "Feedback to Cash Flows.")
Zuckerberg, who holds a total of 533.8 million shares, would sell 30.2 million shares in the IPO — garnering about $1.05 billion in cash at the high end of the proposed price range of $28- $35 for the sale of shares.
So in otherwords Zuckerberg is worth $1 billion in cash and has 534 million shares of FB. If FB goes to zero before he sells the rest of his stock on the market, his net worth drops by something like $19 billion.
Perhaps I was a little too loose with my terminology though, to the point of being confusing. Instead of "owner" I should have said "company" in that paragraph.
This is totally false. They get paid anytime they sell stock. They sell some stock at IPO and get paid some then. It's by no means the only time they ever sell stock and definitely not the only time they get paid by the market.
I corrected/clarified my statements in my reply. Thank you for pointing out the need for clarification.
Google tried to minimize that pop by ditching the traditional underwriting style and roadshow and instead implementing a dutch auction for pre-IPO shares. the banks were so upset at google attempt to sideline them from the process that they ended up colluding with each other (allegedly) to fix the price.
(The process was that after the roadshow, each bank would submit a sealed bid with their price and purchase allocation. The auction system[1] worked by allocating by highest price and allocation backwards until the entire allocation was sold. Somehow most of the banks bid within a few dollars of each other and at a price that was below even the lowest price estimates).
Price ended up popping in the first day, week, month, Google missed out anyway.
Facebook co-opted a number of underwriters and was in a position to leverage itself a good deal (1.5% fees instead of 5-7%), did a large roadshow and took orders the traditional way. Because they pitched the stock so well they both got a higher price than expected and also raised and sold a lot more shares than was expected.
They ended up doing what Google tried to do but without the arrogance (I guess you could say that). the underwriters for Facebook got a raw deal, they had their fees slashed, they had to share their fees with a group of other underwriters (there is usually one main and 2-3 secondaries, this deal had morgan stanley as a lead and heaps of others). They ended up sharing $175M in fees and have underwritten billions in stock and have today seen 10% of their position wiped out.
http://allthingsd.com/20120131/the-quiet-man-meet-the-real-f...
I guess that doesn't matter so much for a $100 billion IPO.