Is Facebook worth $50 billion - or more?

You probably saw in this morning's papers that Goldman Sachs (along with a Russian partner) are using a "special purpose vehicle" which allows it to skirt SEC regulations and investing $500 million in Facebook. According to the piece in the New York Times, this now values Facebook at $50 billion:

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction.

The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.

But buried later in the article is the following:

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

http://dealbook.nytimes.com/2011/01/02/goldman-invests-in-facebook-at-50-billion-valuation/?hp

So let's think about this: Facebook is barely profitable, and could perhaps generate $2 billion in revenue. Goldman's clients (again, please note that Goldman itself is not investing in Facebook - it only doing so on behalf of its well-heeled customers) are paying 25x revenue for a barely profitable company.

Then there's more. Facebook is still a private company, and apparently has no plans to go public any time soon (although news reports indicate that it is a possibility in 2012). Usually companies in the private market trade at a discount to publicly traded companies simply because they are less liquid.

If we assume a fairly typical 25% private market discount for Facebook, this would imply that Goldman analysis indicates that a publicly-traded Facebook would be worth around $75 billion.

Now, I know what the response to my incredulity will be: I just don't get it. My critics might say:

Facebook represents the future of internet. Not only are there more than 500 million Facebook members, but once Facebook adds such capabilities as email and search to its functions, it will become the most important space on the internet.

Well, maybe I am missing the point, but perhaps there is something else going on: Valuations of internet companies are once again reaching irrational exuberance stages.

Facebook is a company with tremendous potential, and CEO Mark Zuckerberg deserves a huge amount of credit. However, I think you have to assume a huge increase in revenues starting soon in order to justify today's valuations.

Moreover, while Facebook's community is unparalleled, it does have some pretty formidable competitors like Google that are trying to keep their own market share.

The Cost Of Phone Calls Is Headed Toward Zero - 24/7 Wall St.

Ten years ago, in 2000, I attended a technology stock conference here in Boston.

One of the keynote speakers was John Chambers, chairman of the Internet equipment routing company Cisco. At the time Cisco was one of the "hot" tech stocks*, so the meeting room was packed.

If you ever have the chance to hear Chambers, you should. He speaks in the native drawl of West Virginia, where he grew up, and has an admirable ability to frame complex technology discussions in simple, down-to-earth language.

He made a number of good points in his talk, but two in particular still resonate with me a decade later.

First, he was critical of the Japanese government for spending its fiscal stimulus funds on infrastructure projects like repaving highways and straightening out rivers. Chambers argued this was a waste of money, and that the government should instead be investing in Internet and IT projects. While his comments were of course dismissed at the time (since Cisco would obviously be a beneficiary), can anyone look at Japan's economy today and not believe that perhaps much of their stimulus spending could have been better spent?

The second point was one that has also stayed with me, and one that has saved me and my clients a considerable amount of money.

During the talk, Chambers said: "All you have to know about telecommunications is: Voice will be free."

By this he meant that the price of phone calls and any other telecommunications would eventually move to zero.

This didn't mean that the cost of providing the services would be free. No, what Chambers was implying was that the huge costs of providing static-free, reliable telecommunications would doubtlessly rise, but it would be very hard for any company to make any money doing so.

And so it has come to pass. Today only two telecommunications companies in the United States - Verizon and AT&T - have any profits at all. However, these profits are the result of landlines, and not cellphones, where every company today is losing money. As the subscriber base erodes for landline phone service (do you know anyone under the age of 30 that installs a phone in their home or apartment?), the future for all telecommunications companies looks bleak.

As I have been discussing frequently on this blog for the last few months, I believe the investment theme for the coming years will be income. Investors will be demanding more income in the form of dividends from their stock investments for a variety of reasons, but mostly because an aging population is going to need income to live on. Moreover, with the disappointing stock returns of the past 12 years, it will be harder for corporate boards to argue that they can invest their cash better than their shareholders can.

Today, in most client portfolios, I have largely avoided investing in any telecommunication stocks or bonds. I believe these companies are in big trouble: huge infrastructure costs, large legacy health care and pension liabilities, and a declining revenue base. The stocks look attractive due to the high dividend yields they currently sport, but I think that the combination of rising costs and declining prices is a recipe for longer term disaster.

The recent announcement by Google that it will now offer free phone service to its Gmail customers is another step in the "voice will be free" environment that John Chambers discussed 10 years ago. As this post from the blog 24/7 Wall Street discusses, it will probably be only a matter of time before other Internet providers begin to offer similar services.

The Cost Of Phone Calls Is Headed Toward Zero - 24/7 Wall St.


*One Wall Street analyst was so in love with Cisco that he claimed that the company would soon be the first corporation worth $1 trillion. Now, 10 years later, Cisco stock is off by more than two-thirds, and the company has a market cap of $121 billion. However, Cisco continues to be one of the dominant players in the Internet equipment space, proving once again that company fundamentals and stock prices do not always move in the same direction.

From Fortune Magazine: Background Searches on the Web

I've always been surprised by the amount of information people will post about themselves on sites like Facebook. Moreover, even if you delete an email, it's never completely gone - any computer technition with a reasonable level of skill can retrieve anything you've ever written or received.

In short, once you put something out on the Web, or send an email, it becomes public information, yet too many people assume that if they delete a posting later that it is gone.

Well, it's not.

In this note from Fortune Magazine (via a tweet from Lindsay Pollack), the article discusses how much information an organization with reasonable internet skills can find out about someone.

Here's an excerpt:

The so-called deep Internet (also known as the Deepnet, the invisible Web, or the dark Web) is not new, but enterprising techies have recently come up with ever more sophisticated algorithms for trolling its vast contents. To get an idea of the size of the deep Web, consider: Researchers estimate it's more than 500 times the size of the everyday Internet you can see with an ordinary search engine...

.... this means that "Amazon wish lists can crop up. So can your results from the last marathon you ran, and whose political campaign you've given money to, and whether your house is in foreclosure." Ever filed an application for a patent? Declared bankruptcy? Fallen behind on your child-support payments? Been investigated by the Securities and Exchange Commission? A Google (GOOG, Fortune 500) search probably won't reveal any of that, but a deep-Web search could.

Here's a video from CNN discussing the subject:

Please do not change your password - The Boston Globe

I loved this article!

I don't know about you, but I have so many passwords that I have trouble remembering them all. At home, for example, I have 3 1/2 pages of passwords for banking, news services, security systems, Apple, Amazon, etc. It's ridiculous (not to mention frustrating).

And so today, in this morning's Boston Globe, comes this article that it appears that all of this password security may not be all that effective after all.

Here's hoping that someone will come up with a better system.


Please do not change your password - The Boston Globe

Traditional Media Suffers

After I posted the note about Google this AM, I saw this from the NY Times blog. Hard to see what makes these trends reverse:

February 8, 2010, 10:20 am

Magazines’ Newsstand Sales Fall 9.1 Percent

By STEPHANIE CLIFFORD

Magazines’ newsstand sales plummeted in the last six months of 2009, and subscriptions dropped as well.

Newsstand sales for the 472 U.S. consumer titles measured by the Audit Bureau of Circulations declined 9.1 percent, to 39.3 million, in the last half of 2009 versus the same period a year earlier, the organization reported this morning. That follows an 11.12 percent decline from July through December 2007 to July through December 2008.

http://mediadecoder.blogs.nytimes.com/2010/02/08/magazines-newsstand-sales-fall-91-percent/

The Changing Face of Advertising

Interesting read from Business Week. Not only is the article interesting for what it means for Google and Yahoo, but also implies an continual erosion of financial support for traditional media:

Excerpt, with full link below:

Google's Display-Ad Sales Should Top $1 Billion

As analysts say rising demand for Internet display ads will begin paying off for Google in 2010, one asks: "Is this a $10 billion business?"

By Douglas MacMillan

Google CEO Eric Schmidt hinted in July that display advertising would probably be the next of his company's businesses to generate $1 billion in sales. Analysts say 2010 is the year he'll deliver on that prediction.

------------------------

Companies tend to use online display advertising to raise awareness of a brand or product while they deploy search ads to encourage customers to take a specific action—for instance, click on a Web site or make a purchase. Because search ads are often cheaper and their effectiveness easier to measure, budget-conscious advertisers flocked to them during the recession. Now, however, display is getting a boost as big advertisers that have traditionally focused branding efforts on TV and print are shifting more ad dollars to the Web. "There's a lot of money to be tapped that otherwise would be allocated to TV, that will be moved online," says technology analyst Greg Sterling. This year, online display advertising may grow 8.2% to $7.9 billion in the U.S., from $7.3 billion in 2009, eMarketer says. Search advertising is expected to rise 5.6% to $11.4 billion.

http://www.businessweek.com/technology/content/feb2010/tc2010027_356976.htm

Social Media

This report from emarketer.com caught my eye. There's lots of statistics that you can read for yourself, but I was surprised at the overwhelming popularity of Facebook - even among the World War II generation. I was also interested at the fairly low (13%) of so-called Generation Y that used LinkedIn - I would have thought they would be using it for job searches.

Baby Boomers Get Connected with Social Media

JANUARY 28, 2010

Living longer and richer lives, they go online to stay in touch

Baby boomers have always been good communicators, as evidenced by their presence at sit-ins, protests, demonstrations and “happenings” in the 1960s. So it was inevitable that boomers would check out social media sites.

“Creating and renewing personal connections online is the biggest draw for these boomers,” said Lisa E. Phillips, eMarketer senior analyst and author of the new report, “Boomers and Social Media.” “About 47% of online boomers maintain a profile on at least one social network, according to several sources. Their contacts include family, friends and co-workers of all ages.”

Burst Media reported that 47.5% of online boomer respondents had a social network profile in June 2009. In September of that year, Deloitte found 46% of boomer respondents said they maintained a social network profile—an important difference from simply creating one and forgetting about it.

Boomers’ social network presence has grown steadily since Deloitte’s 2007 survey, when only 30% said they maintained a profile on a social network. In that period, millennials’ use of social profiles remained fairly steady—and heavily penetrated—at 71% in 2007 and 77% in 2009.

Facebook is the favorite social network for boomers, as both comScore and Anderson Analytics data show.

“Boomers expect that technology will help them live longer and better lives and keep them connected to family, friends, co-workers and, eventually, healthcare providers,” said Ms. Phillips. “To fulfill these expectations, boomers are turning to social media, where they keep up their offline social connections and make new ones. Online marketing messages that help them build on their connections—and foster other online relationships—will get their interest.”

Computer Passwords

I don't know about you, but I get very frustrated with passwords for the various sites that I like to visit. At home I have at least two pages of various passwords that I have used over the years, even to buy movie tickets on line (why do I have to have a password to buy a movie ticket??).

Today's papers carry a story about passwords, and how too many of us use easily hacked passwords. According to the report, here is a list of the most common passwords:

1. 123456
2. 12345
3. 123456789
4. Password
5. iloveyou
6. princess
7. rockyou
8. 1234567
9. 12345678
10. abc123

Here's the link to the whole story: http://www.guardian.co.uk/technology/blog/2010/jan/21/password-analysis-weakness-rockyou

Interesting Article on LinkedIn