Facebook buys Whatsapp for $19B: Value and Pricing Perspectives
aswathdamodaran.blogspot.com
aswathdamodaran.blogspot.com
Again, this is just a shot in the dark. A wild stab at a rationale. But that's what will happen with an insane price valuation like $19B.
Not only does FB have seed funding for the gov't, they have shown themselves to be much more inclined to provide access to their data, when compared with Google and others. FB would therefore be an excellent partner to circumvent the international telecoms through a single msg service.
Just because you can't think of how the money flows, doesn't mean it doesn't or that it hasn't. The CIA supported the Guggenheim foundation, and the Iowa Writers Workshop. They could easily provide institutional support for FB stock, thereby essentially saying to FB - get this company, and we'll have your back on the markets.
So the question is, not whether I've thought this through, since this is what I'm doing to justify the insane valuation, but whether you are willing to think it through, or instead dismiss it outright, until the time come when the evidence shows you to be wrong. As we learned with Snowden et al.
This just seems goofy to me. If you're an investor, isn't that exactly what you're supposed to base it on? After all, you're investing dollars into the company (presumably). It seems a dangerous game of chicken, because people don't put their money into a stock just to watch them get more users, they do it to eventually get more money back. To me, that's done in 2 ways: if the company actually makes enough money and gives a dividend, or secondly by selling to a 'greater sucker'. If you ignore "traditional metrics", aren't you betting on the 2nd one?
And even if we do that, FB can really "only" grow their user base by ~5.5 times. Beyond that, you have to look at things like revenues, operating margins and risk, don't you? I understand that when FB was at 10 million people they were growing extremely quickly, so their valuation was probably crazy high, but how much growth can FB really have anymore? Now that they're public, isn't that supposed to be the time when revenues, operating margins and risk actually kick in?
For the record, this is exactly why I don't invest in social media stocks--I don't understand it. It might make sense to someone else, but not to me (yet, anyways).
> At this stage, if you are an investor, you have two choices. The first and less damaging one is to accept that social media investing is not your game and move on to other parts of the market, where you can find investments that you can justify with fundamentals.
That's what it is. You can't use regular metric for the same reason you can't use regular metric playing the slots. Even though chances say you won't, you can win big and there is a new jackpot winner every few months to remind you that.
There's nothing preventing them from data-mining messages and stripping out identifiable information (like what Google does w/ Gmail) to better target ads in other services.
Basically, some companies are "in fashion" the same way bellbottoms or baggy pants were, and the only way to explain why is to say, "because it's cool... for now."
However, he does a good job of wearing hats of other types of investors, which is why I enjoy his analyses.
Bottom line is that social media companies will either have to sustain these valuations forever, or they will eventually fail. When times of turmoil hit, user base and engagement will not be enough save a company. Cashflow is the only surefire metric that indicates a company's success.
Facebook did not buy this company to get users. Facebook bought this company because it was a threat. There is not much value in being #5 in social media. Facebook has to destroy or acquire every serious competitor that comes along, or they will start hemorrhaging users. You don't acquire a company to get new users so much as you acquire the company to keep from losing customers due to declining mind share and 'coolness', and thus to keep growing customers organically (because you are #1, not because you own FoobyAppInc). They paid $19B not because they put a dollar amount on each user, they paid that because that is what it took to get the other side to say 'yes' to acquisition. (All my own opinion, I claim no knowledge of what actually went down or what MZ actually thinks).
And that is the biggest reason I will never buy Facebook stock. You can take them out, or force their hand, with a few million dollars in VC and an idea. You don't need $50B, or what have you to challenge them, (whereas you would need at least that amount to challenge Ford, Coca Cola, and what have you).
The above is all from a value investor's perspective, of course, where you do not merely look at free cash flow valuation but also look at the company's moat (how easy is the company to defend from competitors).
edit: I hypothesize that Facebook and similar companies will find themselves in a very similar situation as Berkshire Hathaway when it was just a textile factory freshly purchased by Warren Buffett. They had to dump endless amounts of money just to break even. A competitor would buy a new loom that is 5% more efficient, and so BH would have to spend capital to get that same loom to remain competitive. It did not yield an advantage to either company. It may help the customer if prices can be lowered after the equipment is paid off, but the CEO's job is to reward stockholders, not customers. Buffett eventually shut it down as a money pit. It is not a foregone conclusion that this will happen to Facebook, but it seems likely, and is enough to have any rational value investor running away in terror.