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Comment by Igglyboo | Hacker News Reader

Does anyone think it's crazy that a glorified messaging app is valued at $16B and that SpaceX, a company that puts things into orbit and literally does rocket science, is only $10B?

I'm sure WhatsApp is an outlier because I see it brought up all the time when the topic of valuation arises but it still seems like SpaceX should be worth a lot more to me.

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I'd say (without much knowledge of SpaceX's financials) that it probably shouldn't be valued any higher. I'd argue it's fallacious to compare with WhatsApp because it's obviously overvalued.

Adding some perspective:

Ferrari enterprise value: $6.03bn

Heineken enterprise value: $11.857bn

American Airlines enterprise value: $10.666bn

KFC enterprise value: $19.492bn

Audi enterprise value: $17.731bn

Clean water for the entire planet: $10bn

Top 50 college football programs: $15bn

World's music industry: $16bn

Mozambique's GDP: $18.9bn

Sources:

http://www.thedrum.com/news/2014/02/20/19-brands-facebook-co...

http://list25.com/25-things-facebook-could-buy-with-19-billi...

http://www.telegraph.co.uk/technology/facebook/10652397/Face...

I get most of those except for the college football programs.

But I do see why for others there is value there, bread, beer and entertainment (or, as it was in the old days, bread & circuses) have been able to capture very large audiences for millennia. (And the Music Industry and Heineken are reprentatives of the same category.)

It is my opinion that it is generally fallacious to compare Market Cap with GDP.

Why?

Cuz GDP is a measure of economic output (throughput, generally per annum) whereas Market Cap is a measure of worth at a moment in time. The units don't match up but since they are frequently omitted we get unlike things being compared.

What do you reckon?

Agreed - GDP is a historical record of a year's worth of activity. Therefore GDP more accurately corresponds to a company's net revenue - a net of what the country produced/consumed/spent/imported/exported/invested over a year.

Market cap takes future earnings and total value into account. There is no such calculation for countries, but a country's "Market Cap" (potential) should, in most cases, be higher than its "Net Revenues.

There is actually. When a country issues bonds you can see some of the future value of the country's output reflected in the interest rate they can get their loans at.

There is such a metric - it's called national wealth [1] and it functions much like market cap on a national level. The mechanisms are different as countries can't be "valued" because they can't be bought and as such have no market price. Regardless, economic health is taken into account because the underlying asset values ARE calculated based on market price. National wealth is largely seen as an indicator of ability to pay off debt because it provides a tax base.

As an example, the national wealth of the US in 2014 was $81.8 trillion, while our GDP in 2013 was $15 trillion. So your intuition is correct; GDP is a horrible way to value a country. Though in practice, GDP tends not to vary a lot in mature economies (i.e. inflation tends to stay roughly the same year to year), so you can do a relatively simple NPV calculation on the GDP to approximate the national wealth.

[1] http://en.wikipedia.org/wiki/National_wealth

Erm, your sourced numbers are off. I think the article you're quoting is specifically looking at brand value, not enterprise value:

Heineken enterprise value: $57bn [1]

American Airlines enterprise value: $36bn [2]

Yum Brands (KFC parent company) enterprise value: $37bn [3]

Audi looks to be about right, and Ferrari is still a private company so their EV is a bit harder to quantify. The rest of your numbers are also harder to quantify; so I won't take issue with them.

I agree with you that it's fallacious to compare SpaceX to WhatsApp because the vast majority of WhatsApp's valuation comes from the terminal value. Given that WhatsApp was purchased largely with Facebook stock (which also derives its high price from a large terminal value) I would say this is a case where Facebook basically paid for WhatsApp in "Facebook bucks", not actual US dollars. Since Facebook and WhatsApp are in largely uncharted economic territory, there is a large degree of potential error in the terminal value. SpaceX, meanwhile, is in an industry that existed prior to 10 years ago, and is thus a lot easier to accurately peg a terminal value to. Additionally, SpaceX requires a significant amount of capital investment to grow and perform additional research, while WhatsApp can scale enormously with very little capital needs.

[1] http://ycharts.com/companies/HEINY/enterprise_value

[2] http://ycharts.com/companies/AAL/enterprise_value

[3] http://ycharts.com/companies/YUM/enterprise_value

Is WhatsApp overvalued?

Mark Zuckerberg made the decision of WhatsApp deal. In this planet he probably has the best visibility on revenue opportunities of mobile social networks.

Facebook market cap is around 190 billion as of writing, and they have +1B monthly actives. WhatsApp had around 400M monthly actives when the deal was announced. If Facebook can implement ad model to WhatsApp as succesfully as it has implemented it to Facebook mobile app, it is totally possible that WhatsApp $19B deal was fairly valued. Maybe a bit overvalued as a defensive move, but not out of proportion.

I think that both WhatsApp and Facebook are significantly overvalued, but some very smart people not only disagree with me, but also put their money where their mouth is.

For fun, WhatsApp was acquired for what, $16b? With 400m users? Or $40 per user.

Even if the user base continued to grow to 1/7th of all humans on the planet, that's still $16 per user. Over 5 years that's about $3.2 per user per year. Can they monetize that much?

Their fee is $1/year with the first year free. So assuming a billion people use it, it would take 17 years to get their money back in gross revenue terms. Who knows how long in net revenue.

FB has a little over a billion users, and makes about $6 per user per year in gross revenue with tons of advertising.

Is WhatApp overvalued? A little.

Worldwide commercial launch revenue in 2012 was $6.5 billion. Growing, but unlikely to explode any time soon. Global advertising spending worldwide was $509 billion. The valuations make total sense in the context of those figures.

Until there is something useful in space other than satellites, market value for space companies won't be that high.

True, yet so depressing

Advertising is a zero-sum game and is in theory capable of consuming (i.e. wasting) an infinite amount of resources, so it's not really good for comparing with space launches.

How is advertising zero sum?

It is true that ad spends generally result in diminishing returns, however diminishing returns are far from zero sum.

In industries subject to economies of scale advertising is actually really good for economic efficiency and does not at all waste resources rather causing them to be used more effectively.

Because after the initial period of your customers not knowing about a whole category of products, you're just spending money on getting people come to you instead of to a competitor. It's zero-sum, because what you and your competitors spend on ads mostly cancel out - you're competing for a limited, finite pool of customers.

It's zero sum for the advertisers - for each ad spot, there can only be one ad, so if I win the auction, you lose. Of course, since it's an auction, the winner will be spending increasing amounts of money on it, with no real upside (still the same amount of ads displayed).

It's all very good money for the ad platform/brokers.

That may change if they can get the launch prices down to the projected $5-7 million range.

It may. Given that claims of cheap access to space have been around since the 60s, however, people are understandably cautious about this one. Everyone talks about economically recoverable expendable liquid boosters (planned for Saturn V derivatives, as an upgrade for the Energia Zenit boosters, and so on), but no-one had done it yet, never mind established that it can actually be done cheaply.

In July, SpaceX successfully soft-landed a Falcon 9 first stage in the Atlantic. Now that they've proved they can do it, they're going to try over land next.

So they're already very close to the dream of a liquid booster that you can just land, refuel, and relaunch.

The Soviets were also very close to that dream for some time, without ever getting it economical. The US was kind of doing it with solid boosters for decades, but again the economics were dubious; it would practically have been cheaper to build new ones (and I believe that's the plan for the SLS; the solid boosters won't be recovered).

Don't get me wrong, it'll be great if they manage it, but I don't think it's as easy as people seem to assume.

Well, they have been working on it steadily for 12 years now.

I don't think it is easy, but I do thank that they have very nearly solved that difficult problem.

Well that one word also applies to valuation as well, exploding is something an App doesn't need to worry about. The failure opportunities for Space X are much more crippling and public in scope. They are operating in a very risky technology area and it may be that its hard to get investors to just throw money at it.

Which one has most revenue potential, though? SpaceX makes medium-heavy rockets, and will soon make a super-heavy. This means that their primary competition is the Ariane 5 (especially once they have their super-heavy, which will allow them to compete in the heavy GTO market). Ariane 5 is currently on about 5 launches a year costing 140m euro a shot, and SpaceX plans to undercut it. Let's say they take the whole Ariane 5 market, and also the whole commercial Proton market. That's probably about a billion a year, in a fairly low-profit market.

Of course, they also make some money on NASA contracting and grants, but I don't think anyone has ever managed a huge valuation on being a government contractor.

It's entirely possible that SpaceX will open up whole new fields of space industry, but at this point it's hardly something that most people are going to bet on.

> I don't think anyone has ever managed a huge valuation on being a government contractor.

Lockheed Martin is worth around $52B on the NYSE.

Sorry, should have been clearer; I don't think anyone has ever managed a huge speculative valuation. Lockheed Martin has a normal big-company P/E (~16, about the same as Apple or Microsoft, or half of Google's); their price is justified by earnings. Now, if they had a Facebook-like (88) or Amazon-like (880) P/E, that'd be different.

Keep in mind that much of Facebook's purpose in buying WhatsApp was protection against it becoming the dominant player in social media. Facebook is always needing to protect itself against being overtaken by the Next Big Thing, so their strategy is to buy potential competitors before that happens. WhatsApp had a steep upward velocity, so the price Facebook paid for it was based less on its current worth and more on its trajectory.

I think the two sides of this discussion are battling between current economics vs. ROI for humanity.

WhatsApp adds almost zero because there are many other options to text everybody. So it's just another company that got traction. It could die tomorrow and nobody would worry much. It can be easily replaced. There is no long lasting value (again, due to so many other options and the easiness of creating it from scratch again). Text chatting is a exhausted marketed, in terms of innovation. If WhatsApp is secretly working on hologram technology then it'd be another entirely different matter, but I doubt that's their focus.

SpaceX, on the other hand, is making breakthroughs in engineering and science. What they create will be with us for a long time, can yield multiple patents, can feed into other inventions.. I think it's very difficult to argue that creating technology that allows us to go to other planets has little value. I think it has a lot.

So I think we're substituting the question "where should humanity invest money?" for "which companies are correctly valued". The latter is much easier to answer based on economics. The former, quite difficult to agree on.

I totally agree with you. I think we all know Facebook overpaid for Whatapp and SpaceX has a higher realistic valuation. Great post!

It's a side effect of incremental margins on different goods/services. Selling physical things has a lot of overhead, requires lots of big, expensive capital equipment, has a modest profit margin, and has a narrow range of scalability. Selling virtual goods and services has a small overhead, huge scalability range, and potentially enormous profit margins (approaching 100%).

This leads to weirdness as you've described where the fact that a billion people deriving marginal utility from something is far more valuable than a much more "important" market where the utility is much higher but the volume is low. But this isn't a new phenomenon, there's also the situation of movie/tv/music stars related to industry, for example, which we've largely come to accept as normal but is equally bizarre. There are stars who are multi-millionaires despite having sort of sub par work, but because it appeals to such a large market and because scaling and incremental profit can be so high in media it's much easier to get rich. Johnny Knoxville has more annual revenue than lots of small companies working on very hard and interesting problems, that's just the way the economics works out.

What does SpaceX do as a business? Sell a few super expensive products per year. The number of governments and companies that can afford their product will never be large, ever. What does WhatsApp do? It hooks millions of consumers on freemium offerings and sells cheap add-ons to hundreds of thousands a year. Users often use it multiple times a day. WhatsApp sounds like a much better business.

Not at all, usually what the 'intelligensia' thinks are 'important' industries are not really that important at all.

Things that benefit the common man are usually way better economic bets than lofty ideals.

Getting most of india talking to each other is far more important than a 50 people circling the earth.

Unfortunately that's not how economics works. Inbuilt into your statement are a couple of biases. Chiefly, that on the basis of total economic value:

glorified messaging app < puts things into orbit and literally does rocket science

...which is not necessarily the case.

Now, we can talk all day about whether EMH is accurate or not and if the investors in these companies have "perfect information" or not, but there would have to be pretty conclusive evidence that there is something other than economic forces impacting investors valuation of these companies.

> glorified messaging app < puts things into orbit and literally does rocket science

This is obviously not true if you count economic value, and obviously true if you count "value" as in something good and useful for humanity. In our economy, the former is a proxy for the latter, but both forms of "value" are getting more and more misaligned nowdays.

hell yeah, a messaging app won't save the human race. If Elon is successful in his endeavor, we won't have to worry about a single planet-event wiping out the human race.

Elon is building a satellite launching company. Nowhere in that endeavor is the technology to permanently move a sufficient number of people to some other planet.

The differences between what SpaceX does today and a self sufficient permanent colony on Mars are far far greater than the difference between what SpaceX does today and and the fireworks I shot off last weekend.

You comment is doubly wrong.

Spacex is definitely not limited to satellites, they are planning to launch people in space and are currently delivering cargo to the space station.

There are plenty of information, some by Spacex, that show how their technology could be used for a permanent settlement on mars.

Their goal:

SpaceX designs, manufactures and launches advanced rockets and spacecraft. The company was founded in 2002 to revolutionize space technology, with the ultimate goal of enabling people to live on other planets.

> Elon is building a satellite launching company.

s/is building/has built

> Nowhere in that endeavor is the technology to permanently move a sufficient number of people to some other planet.

Nowhere in 1999 Google was the technology to autonomously drive cars, either. Yet, Google's cofounders explained their vision in 1999 to collect and organize the world's information. Vision and leadership is an important part of predicting a company's future, and Elon is very clear about this: The purpose of SpaceX is Mars colonization.

If some sort of event (nuclear war, giant asteroid, whatever) killed everyone on Earth then everyone who lived in a theoretical colony on Mars would die too. Maybe not immediately, but the gulf between our current capabilities and what it would take to build a permanent self sufficient colony on a planet like Mars is absurdly large.

It is possible to build a self sufficient colony on Mars and it is also Elon's stated intention. It is not an easy task and we will have a permanent colony before we have a self sufficient one, if we have a colony at all. 66 years passed between the Wright brothers first powered flight (which lasted only 3 seconds) and landing a man on the moon. That is a huge gulf in technology. Perhaps we will have a self sufficient Mars colony in another 66 years.

In 1999 it was pretty obvious that if Moore's Law held up as expected, you could do all kinds of stuff within a few years.

Until we see rocket fuel doubling in energy every eighteen months, any idea of a Mars mission (let alone colony) paid for with private money is wishful thinking.

The 'microwave thruster' article posted recently circumvents that problem - no reaction mass necessary. A Mars mission is now supposed to be practical, energywise.

Oh yeah! And the rocket can use faster-than-light neutrinos to avoid annoying latency when talking to Houston.

That's assuming conventional rocketry all the way.

Have you heard of the phrase "once you're in orbit, you're halfway to anywhere" (Robert Heinlein)?

The delta-v from LEO to mars is only ~4.6 km/s assuming you aerobrake once you're in orbit. Or 3.8 if you're doing aerocapture.

For comparison, it costs ~10 km/s just to get into LEO.

Remember the tyranny of the rocket equation. Saving the rocket fuel required to get into orbit drops the total fuel cost by an absurd proportion.

We already have the tech for being able to do at least an order-of-magnitude drop in price to orbit, if not more. Launch loop, etc. (With a launch loop you need ~120m/s additional to get into LEO, but that's peanuts comparatively.) The biggest issue currently is that it's a lot of money to potentially build. And the political components.

Yeah, it'd be a huge chunk of change to build. But it's potentially worth it.

As crackpot ideas go, the launch loop (or variants thereof), is the one that I am (still) most excited for.

Just the difference in energy budget is enough to prove your point. But there are additional issues like radiation exposure to astronauts that make travel to Mars prohibitively difficult even with the biggest rocket imaginable.

Realistically, the only hope we have of seeing astronauts on Mars is if China and the US (or some other pair of countries) gets in a Cold War-style pissing contest.

I don't think the people downvoting you realize just how big of a project a self-sufficient off-planet colony is. Nobody really knows how many people it would take to be self-sufficient, but I'm guessing that it's at least 100,000. The total number of people who have been to space, from all countries' space programs over the course of ~60 years or so, is 536, and not one of them has left Earth orbit.

Looks like we need at least 3 orders of magnitude of improvement before we can even start to think about it. If SpaceX's program for reusable rockets succeeds beyond Musk's wildest dreams, we might get like 1 order of magnitude of cost reduction. There's still a hell of a long way to go, and that's if everything works perfectly.

A semi-permanent colony might be doable, but anyone there wouldn't last long without regular resupply from Earth.

but look at our personal expense.. how little do we spend on life insurance premium vs. entertainment? That's a reference point for what we would consider as value of protecting a human race wipe out event vs. a messaging app.

Life insurance does nothing to protect us against injury or death, health insurance does. Look how much we spend on health insurance.

Besides the other comments, it seems like a mistake to compare purchase price to investor valuations. Buying control of a company is worth a lot more than buying part of it.

Value here is defined by how much it's worth to one (or more) people. Think of it as a price. It does not represent an objective contribution to humanity.

Is a seat in Orchestra section really worth 3 times more than one in balcony? Hard to tell, but some will pay that difference because they consider it worth it FOR THEM, therefore that's the valuation of that seat.

Is "a glorified messaging app" vs. "puts things into orbit and literally does rocket science" a fair comparison?

Surely there are deeper technical challenges and social motivations to "a glorified messaging app".

How about considering the value of wide-spread human communication vs. multi-planetary human existence & space research?

Don't forget that Facebook's market cap is almost 200B...

The reason facebook is worth that much is because its network effects have been realized. The social utility of 1 person on a network is nothing, but with 1 billion it's incredible.

Humans can't perceive exponential effects intuitively and on the scale of SpaceX its almost impossible.

Definitely agree and that was my first thought after reading this headline. I'd say that it's due to delayed gratification/not seeing the forest for the trees.

There isn't a whole lot of money in space. There is a ton of money in communications.

Much of the future of communications is in space. For example, a lot of the recent and upcoming SpaceX rocket launches are communications satellites.

Yeah, but that's nothing new, and there still isn't much money there. And space colonization is so far in the future it gets discounted down to zero. If SpaceX is mispriced, it's on the high side if you ask me.

> Much of the future of communications is in space.

Not obvious. This month Google announced a big trans-pacific underwater internet cable system, for instance. Although it is clear satellites still have a major role in intercontinental communications, it's not clear to me whether this role will prevail in the future.

ref: http://finance.yahoo.com/news/google-asian-companies-invest-...

It's not the communications money that drives insane valuations of random apps, it's the advertising money.

Get mining robots to an asteroid and there will be a LOT of money in space.

Only at first glance. They are valued at 10B$ and they still only launch less than 10 rockets per year. When they reach 100 or 1000 launches, their value will go up with the same ratio or even more.

This is something WhatsApp can't possibly do, as their market can't grow much more, but space is only starting to.

No, the investors have already anticipated that. Modulo market risk, $10 billion is what SpaceX is expected to be worth.

Sure right now. I was talking more about 10-20 years into the future.

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