If you have a question about economics do not put the words ‘face’ and ‘book’ in the title.
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I still don’t get it, or better: This is what I don’t get. In what universe are the odds of facebooks revenue going up more than 5x roughly equal?
Sure there is a chance Facebook will dominate the interwebs for years and years, there is also a chance FB will NOT succeed to keep their users, find a real businessmodel and multiply 10x
In fact there is a real chance FB is at its zenith and will slowly fade away as the cool kids dont want their granny’s opinion about the party they visited last week.
How do you get a positive expected value for this bet?
Online dating sites spend a lot more than most other advertisers. And one of the more reliable pieces of information FB has is your relationship status.
I think that a lot of investors are hoping for a “network effect,” i.e. that more and more people and businesses will join Facebook because everyone else is joining Facebook.
That’s kind of how things are with Microsoft Windows. Lots of people use Microsoft Windows because it’s easier to run with the pack. Same thing with e-Bay.
If such an effect takes place, then it’s easy to see Facebook’s revenues multiplying by 5-fold, 10-fold, or more.
This. I knew FB was starting the downward slide to irrelevance when grannies started joining.
I have an assortment of FB “friends” but few of them post anything these days except one guy who keeps changing his photo and two women who keep liking each other’s updates. Last week a headhunter posted an ad that basically said, “They are in a hurry so first person who responds to this gets the job,” but nobody replied. Then she called me and I start Tuesday, with no FB involved.
And what happened to LiveJournal? It seemed like it would be big, but now it’s mostly used by Russians.
I agree that’s a serious risk. It could be that Facebook is like the current hot night club – all the cool people go there because it’s so hot; and it’s hot because all the cool people go there. Until one day the cool people start going somewhere else and the whole thing unravels.
Maybe Facebook should have an e-bouncer which cancels the profiles of people who are deemed unattractive.
No real Facebook presence here, so take this with a grain of salt.
Something that seems to be missing in the answers above (forgive me if I overlooked your post) is what Facebook is going to do with the monies it raised. For example, I hear complaints of Facebook’s lack of good search and suggestions that if it harnesses a good search function, it could compete with Google. An investment in FB isn’t just jumping on the bandwagon and hoping for a piece of what it currently puts out, it’s a bet that it will be able to leverage its existing base combined with enormous research and purchasing dollars to find substantial new revenue streams.
FB has almost a billion users and a healthy percentage of them spend an unhealthy amount of time on FB. $4/year in revenue per user is pretty small and likely to increase. The bet that stock buyers* are making is that FB comes out with some killer app or service that monitizes the users. Imagine if FB comes out with some popular subscription service that charges $1/month.
In other words, having nearly 1 billion invested users gives them a lot of potential clout.
I have not bought stock in FB nor do I have an account.
One thing that facebook can do better than anyone else is targeting people with specific interests. Say you wanted to sell instructions on how to knit a bicycle seat cover to people in Denver. On facebook you could easily create an campaign in 5 minutes where only people in Denver who like bicycling and knitting would see the ad. It’s trivially easy to be as specific as you want with the criteria. Trying to target the same group of people without facebook would either be impossible or very expensive. That capability is why facebook is valuable to advertisers.
The other side of the equation is how much response the ad gets. From what I’ve been reading, most companies are disappointed in how their facebook ads have performed. This is especially true for small businesses which need to have an immediate return on investment.
The challenge for facebook is to somehow turn their user base into more ad revenue. Depending on how they handle that, the stock price should respond accordingly.
A Facebook phone is an interesting idea. But which carrier and which OS? I can’t imagine that Google would want it to be an Android phone. So perhaps it will be a Windows 8 phone? I think the Windows phones already have a Facebook button on them.
How many of FB’s 800-million strong users are in poor, 3rd world countries…and have virtually NO purchasing power?
It is like setting up a WalMart in a poor village in India-lotsa people, but no money.
I don’t buy the 800-900 million user number at all. I feel it is a crock of shit. Many people have 2-3 accounts most others have one and do not use it at all or vary rarely. My daughter and her friends make fake joke accounts on the regular, I have as well. Plenty of the pages have maybe 1-5 likes or followers, are they counting pages as well?
I think it is at most half that number of separate legitimate users. Regular users probably 10% of that. Pages do not count in my opinion.
Notwithstanding all the good analysis above of Facebook as a going concern, here is some generic information on the market.
Volume has been in the hundreds of thousands of shares for a few days. Remember that for every share that has a seller who would rather have the cash than the stock, there is a buyer who would rather have the stock than the cash. You don’t really know for sure what will happen in the future but analysts usually look at company fundamentals and price/earnings ratios. A P/E of 10 is considered fairly normal, about what Apple’s is today. Facebook’s P/E is estimated at somewhere in the 40 to 100 range, harking back to the old dot com bubble. My conclusion is that the market has short memory and people are irrational.
You can’t meaningfully compare stock prices that way, because a share is an arbitrary fraction of a company. Google has way fewer total shares of stock than JPM, so the per-share price is higher.
In order to meaningfully compare the value of stock between two companies, you need to compare the market caps. GOOG has a market cap of 200B, JPM has one of about 124B. So, with the current price of the respective companies, people are betting that Google with make about 1.6 times as much money as JPMorganChase. A far cry from the 33x multiplier that you’d get if you just looked at share price (which is meaningless).
I agree, and I’ve read that one of the big concerns is that FB has already reached close to market saturation, and is not going to grow in its user base very much.
They’ve got the eyeballs, the question is whether they can monetize the eyeballs. It is not like they invented directed advertising, after all. The real question is whether they are good enough at it to challenge Google who is very good at it.
Everyone has gotten dinner invitations to listen to some investment salesman. Google sees that as a sales pitch with a dinner attached. If FB sees that as a dinner with a talk attached, they are not going to make it. And from what I read, Zuck’s roadshow had very little on advertising.
A company like GM seems to spend a lot of money on its FB site, and sees it as worthwhile, while deciding that giving money to FB is not worthwhile. If that is indeed the trend, they are in trouble.
This is correct. sigh I never get into these threads fast enough to be the smart one.
Market caps? I would much rather look at earnings-per-share, and even better projected 5-year earnings-per-share. Right now, GOOG’s current EPS is $32.99, about 7 times higher than JPM’s $4.50. Given that GOOG’s price is ~20 times higher than JPM’s, investors are expecting much greater earning’s growth from GOOG than they are from JPM. So I would say that the expectation of growth in earnings (as a percentage of current earnings, not as an absolute number) lies between the 1.6* you suggest and the 20* Exapno posits
