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JakilaTheHun (99.92)

How Overvalued Is Facebook?



January 06, 2011 – Comments (30) | RELATED TICKERS: GS , GOOGL

It’s the tech boom all over again!  Or at least, it sort of feels like when mention of Facebook and a potential IPO comes up.  Investors have been clamoring to get their hands on hot social networking sites like LinkedIn and Facebook; this demand has yet to be quenched. 

There have been recent moves towards the inevitable outcome, however.  LinkedIn has announced plans for an IPO in 2011.  Perhaps, the even bigger news was Goldman Sachs’ announcement of an investment in Facebook, which might be the first step towards an eventual IPO for Facebook, as well.  All of this news has brought the question of privately-held Facebook’s valuation to the forefront.  

Valuing Facebook

Facebook’s current implied valuation is about $50 billion according to most media sources.  It has been reported that before Goldman Sachs Investment Partners made the investment in Facebook, Goldman Sachs Capital Partners had access to the deal and declined an opportunity to invest in the company.  GS Capital Partners’ head Richard Friedman was allegedly concerned about a high valuation, among other factors.  While many wealthy private investors want to get their hands on Facebook, the question of whether the valuation is a bit too fat is definitely one worth asking.   

Unfortunately, piecing together a probable valuation for Facebook is not an easy task.  First off, Facebook does not file financial statements with the SEC, meaning we only have access to a limited amount of data in order to build a valuation template.  Next off, high growth companies are, by their very nature, difficult to value.  This is because it’s tough to decide on future growth rates. When will growth decline? When will it dramatically level off?   Does this business have a limited shelf life?  If so, what happens after that?

In fact, there’s nothing particularly simple or straightforward about Facebook’s valuation; but that’s why I’m intrigued by it.  I like dealing with these difficult valuation scenarios and trying to come up with some modicum of a resolution.    

For the record, this exercise is sheerly for entertainment and educational purposes on my part.  I have no interest in investing in Facebook; not now with Goldman Sachs; or in the future for a potential IPO.  You can call me a disinterested party who wants to know more for curiosity’s sake.

Assumptions, Questions, and Complications

Here are some initial questions that I want to sort through before running any valuation models:

(1) How long does Facebook continue in “high-growth” phase and where does its growth level off?

(2) Is Facebook a “fad” that will eventually go away?

(3) How does one determine an appropriate discount rate for Facebook’s cash flows?

(4) While cash flows for the next few years might be relatively certain, cash flows further along the lines are much less so.  How do I account for this? 

(5) What if Facebook’s social media niche dies off?   Can they use a massive cash horde acquired during boom years and put it to good use somewhere else?

(6) How competent is Facebook’s management team in branching out the business into new areas?

(7) What are realistic future profit margins for Facebook?

(8) What incentives do people have to stay at Facebook if “something better” were to eventually come along? 

Some of these questions are quite tricky.  We can assume that Facebook will continue to grow rapidly for at least another year or two, but beyond that, it’s difficult.  Unfortunately, there’s a pretty big difference between applying a 50% growth rate to revenues vs. a 10% growth rate in 2013. 

The question of whether Facebook is a “fad” is an important one.  Will it even be around in 2020?  Will you care about it ten years from now, or will it be like hair metal and long been replaced by “hipper” things 10 years afterwards.  Yet, even if it is a fad, it’s hard to deny the major cash flows streaming into the business over the next few years.  Even if Facebook, the social network, eventually fails, what’s to say that Facebook, the cash-cow conglomerate wouldn’t succeed? 

Profit margins are a difficult issue, as well.  According to the articles I’ve encountered, Facebook’s current profit is around $400 million.  This is absolutely massive considering it comes on a mere $2 billion in revenues.  That’s a whopping 25% profit margin!!!  Is that sustainable? 

On the face of it, Facebook has a moat about as wide as the Mississippi River, so it might not only be sustainable but expandable!  Yet, things have a way of changing quickly in the tech world.  Remember America Online?  No one could touch AOL in the dial-up Internet game in the late ‘90s; even in spite of terrible service, constant gimmicks, and overly restrictive controls.  A few years later, no one in their right mind wanted AOL’s terrible service, constant gimmicks, and slower-than-slow access speeds, when they could get DSL or cable internet and not have to deal with those headaches any more.  This is to say, moats in the tech world can shrink very quickly as new technologies and fads move in. 

Google and others have tried to break in on Facebook’s niche and have had virtually no success in doing so.  Maybe the problem is that everyone is trying to be Facebook, rather than trying to be “what comes after Facebook.”  And maybe one of these days, when someone figures that out, Facebook suddenly has more competition, and a massive 25% profit margin is in danger.   So there’s another potential issue on the horizon.

All these issues bring me to the discount rate, which is tricky as all gets at.  Traditionally, investors will come up with some weighted cost-of-capital and apply it throughout a period in order to determine a rate to discount future cash flows at.   I’m skeptical of this approach when it comes to Facebook.  Those projected cash flows 2 years from now seem significantly safer to me than the projected cash flows 10 years from now.  I’d go so far as to say that it might be prudent to discount all cash flows beyond Year 10 back to 0, due to the extremely high level of uncertainty surrounding them.   

This is certainly a debatable issue and some might say it’s insane to not count cash flows after the first ten years, but if I’m completely uncertain as to whether a company’s primary product will exist in 10 years, why should I create imaginary cash flows for it?  For this reason, I have considered a few different approaches to the discount rate and the terminal value in a Discounted Cash Flow analysis.

One final note --- all social media sites seem to wane at some point when something better comes along.  This happened to LiveJournal, Friendster, and even MySpace.  The latter was essentially displaced by Facebook.  What’s to keep Facebook from being eventually displaced, as well?   There is very little in the way of incentives to keep people at Facebook if the winds were to shift.  There is very little potential for cash for most users and very few derive major economic benefits.  In this way, LinkedIn actually has a bit of an advantage over Facebook, because the possibility of obtaining vital job and business contacts constitutes a very real economic incentive for its user base.  There’s nothing comparable at Facebook. 

Scenarios and Valuations

I made one key decision for all my valuation scenarios.  I would not compute cash flows beyond Year 10.  The issue of whether or not to apply a terminal value is tricky, so for each scenario, I’ve attempted to come up with a terminal value.  You can decide whether to apply it to the valuation or not. 

Scenario #1:  High Growth, High Discount Rate

For my first scenario, I assumed high revenue growth, 25% profit margins, and an increasing discount rate in the future.  This rate becomes very high towards the later years.  The model is below:

Link to Valuation Chart #1

We end up with a valuation of $11 billion in this model.   A reasonable terminal value might tack on another $2 billion.   Either way, this leaves us well short of the market’s current $50 billion valuation.

Why this Might be Aggressive:  Do you expect to be using Facebook in the year 2020? While Facebook might be “hot” now, there’s a significant chance that it will be one of those things we look back on and say, “hey, remember when we all used Facebook?” by 2020. 

Why this Might be Conservative:  My scaling discount rate is very untraditional and if Facebook continues to produce major cash flows, they might be able to invest the money rather prudently.  Hence, the future risk may appear higher to me than it would be in reality.   Also consider that in spite of my “high growth rates”, they would appear conservative by historical measures.  Perhaps I am underestimating the revenue growth potential, as advertising revenues may increase more in the future and the user base will continue to grow.

Scenario #2:  High Growth, with Different Discount Rates

These scenarios are similar to the first scenario, except I took a more traditional approach to the discount rate.  For 2A, I used a moderate 15% rate throughout the period.  For 2B, I took a low 12% discount rate throughout the period.  For 2C, I used a high 20% discount rate throughout the period.

Link to Valuation Chart #2

Valuation is at $12.2 billion for 2A.  A terminal value of $5-6 billion, would nudge that closer to $18 billion.

For 2B, valuation increase to $14.1 billion.  With a $8 billion terminal value, that would push us up to $22 billion. 

For 2C, valuation falls to $9.75 billion.  $3 billion might be a reasonable terminal value, so you could up it to $13 billion with that.  

Why this Might be Aggressive:   Once again, are my growth rates realistic?  Social network sites don’t tend to have long shelf lives, so it may be unrealistic to assume FB can produce major cash flows for over a decade.    Also, the costs of capital in the latter years are actually quite low given the huge amount of uncertainty inherent in this business model.

Why this Might be Conservative:   Maybe Facebook changes things.  Maybe the moat is so big that a 25% profit margin assumption isn’t aggressive enough.  Maybe Facebook is able to grow in new, unanticipated ways.  Maybe FB can use the massive cash horde to invest in new business lines, which are successful.  There are quite a few ways that this could still be conservative, but it requires a lot of major “ifs” to get there. 

Scenario #3:  Moderate Growth

For both of these scenarios, I moderate the growth a bit.  For 3A, I use a 15% discount rate throughout; for 3B, I use the scaled discount rate structure I used in Scenario #1.

Link to Valuation Chart #3

This gives me valuations of $9.2 billion and $8.4 billion respectively.   Terminal value for #3A might be around $4 billion, bringing the valuation closer to $13 billion.  Terminal value for #3B would be closer to $1.5 billion, only jumping the valuation up to $10 billion (big difference on how we treat the later years).

Why this Might be Aggressive:   Growth still might be too high.   Margins still might not remain this high. 

Why this Might be Conservative:   Growth might be underestimated.  Discount rates might be too high.

Scenario #4:  Growth Wall, High Discount Rate

For this scenario, I assume that Facebook is a fad and that the company will hit a “growth wall” at some point, where it loses popularity as other sites start to move in on its turf.  I did two different variants with this scenario; the first one only includes shrinking revenues.   The second one also assumes declining profit margins over time.

Link to Valuation Chart #4

We end up with valuations of $5.1 billion and $4.3 billion respectively.   Terminal value in these scenarios might not be too important.

Why this Might be Aggressive:  Believe it or not, this could still be too aggressive in treatment of profit margins.  25% margins are high.  Maybe they shrink faster than I allowed them to in this scenario. 

Why this Might be Conservative:  For all the reasons detailed in scenarios above.  Also another issue to consider is whether or not the early year cash flows would be enough for Facebook to transition into other industries, once it saw that its social media niche was dying out.  In such a scenario, my revenue figures and terminal value would be highly unrealistic.

Scenario #5:  Absurdly High Growth, Impenetrable Moat

Finally, just for fun, let’s try to come up with an absurdly bullish scenario.  We will have absurdly high growth, we will keep the 25% profit margins, we assume FB’s moat is impenetrable, and that the entire business model is sustainable over a long timeframe.

Link to Valuation Chart #5

Since this undermines my original assumption regarding terminal value, I went ahead and calculated this scenario on a more traditional model.   However, I still only show the first ten years. 

The valuation (with terminal value) is $34.8 billion. 

Why this Might be Aggressive:  Because I went out of my way to make some of the more ridiculously positive assumptions possible.

Why this Might be Conservative:  I’m having a hard time coming up with a reason as to why this would be “conservative", but let's go with the stock reason that I'm 'underestimating growth.'  Maybe Facebook becomes the next Apple and can innovate further; I view this as unlikely, but let's consider it. 



As you can see, it’s fairly simple to alter our assumptions in a few ways and come up with valuations that are radically different.  Our low-end valuation among the scenarios was $4.3 billion.  Our high-end valuation was $34.8 billion.  More realistically speaking, I’d view $22 billion as a more legitimate ‘high-end’ estimate.   Either way, both of these figures come far short of the reported $50 billion valuation the market currently places on Facebook.   People buying in now are paying a 43% premium to my already ridiculously-aggressive valuation model; and a 127% premium to my more realistically aggressive valuation. 

Based on all of these scenarios, I would view a realistic valuation for Facebook to be in the $8 - $10 billion range.  This is based on my view that it will remain a cash cow for a few years, before growth lags or possibly declines at some point.  I have yet to see a company in the social networking business not fade as “better “ or “hipper” things come along.  Therefore, I believe Facebook will be forced to use major cash flows and channel it into other areas to continue growing, and there is a lot of uncertainty surrounding that sort of future outcome.

Personally, being a cheapstake value investor, I would not buy into Facebook (assuming I had the option to) unless its shares were priced with a 25% discount to my most conservative valuation, which would put it around $3.5 billion.  Once again, this is personal preference and has more to do with my distaste for investing in this industry; therefore, I would require a much larger safety net to become convinced. 

Regardless, it appears to me that there’s a high probability that people currently buying into Facebook are overpaying, given the high risk and uncertainty down the line.

Disclosure:  No position in Facebook, LinkedIn, or any social networking sites.  No position in GS. 

30 Comments – Post Your Own

#1) On January 06, 2011 at 4:51 PM, XMFDiogenes (87.39) wrote:

Cool post!

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#2) On January 06, 2011 at 5:02 PM, Valyooo (34.54) wrote:

I didn't read your blog (I will later, I promise- I have to run to a meeting in a few minutes) but I will say this

1)  People didn't think MySpace was a fad.  It was.

2) What is the point of going public?  What would it do with that money?  Where would it grow?

Probably good for a hit and run trade, but that is it.

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#3) On January 06, 2011 at 5:15 PM, Rehydrogenated (33.20) wrote:

There are lots of problems to valuing facebook, even exponentially more to valuing facebook stock.

First off, why would facebook even need to issue shares? What are they going to do with the cash? I would be willing to bet that facebook is drowing in mountains of cash and can't even imagine where to put it.

And of course monetizing has always been hard for companies like facebook. For example, facebook can generate profits by advertising. The ads on facebook are non-abtrusive and no one pays attention to them. If facebook makes the ads more annoying (the way myspace did!) they will quickly lose users. But advertisers are paying for people to buy their stuff, so there is a huge conflict every time you try to make more money that limits growth.

Facebook is still growing in users, but from my personal experience their old core of users is fading. For me and my friends it is because we all have better phones. Facebook used to be the best way to get in touch with all your college buddies (many of whom couldn't or didn't want to pay $500 for an iPhone $80+ a month for a plan). Now you can get a iPhone for $50, unlimited calling and a data plan for $20-$30. Naturally, everyone i know can connect fairly easily and use the same resources facebook gave them.

In the end I wouldn't touch facebook with a 10 foot pole. But that gold mine of data is still worth a retarded amount of money (to all the people I would rather not give access to my personal info). 

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#4) On January 06, 2011 at 5:21 PM, JakilaTheHun (99.92) wrote:

First off, why would facebook even need to issue shares? What are they going to do with the cash? I would be willing to bet that facebook is drowing in mountains of cash and can't even imagine where to put it.

It wouldn't necessarily have to "raise cash".  It could be used to allow the private holders a more liquid market for selling. 

Actually, the bigger question to me is why wouldn't Facebook do an IPO.  They've become so big, that they are likely going to fall into SEC scrutiny, even as a private company.  (This is what happened to Google).  Once they have to file financial statements, I'm not sure why they wouldn't want to create a more liquid market for their shares via IPO.  

But I wouldn't buy.  Not unless it got way, way, way cheaper. 

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#5) On January 06, 2011 at 5:59 PM, davejh23 (< 20) wrote:

"1)  People didn't think MySpace was a fad.  It was."

This was my first thought as well.  If I were Zuckerburg, I would sell, take the money and run.  He'd have more money than he could ever spend, and he'd not risk looking like an epic failure in his quest to become the next Steve Jobs.  Don't want to be noted in every business textbook going forward as an example of greed, inadaptability, etc...

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#6) On January 06, 2011 at 5:59 PM, davejh23 (< 20) wrote:

"1)  People didn't think MySpace was a fad.  It was."

This was my first thought as well.  If I were Zuckerburg, I would sell, take the money and run.  He'd have more money than he could ever spend, and he'd not risk looking like an epic failure in his quest to become the next Steve Jobs.  Don't want to be noted in every business textbook going forward as an example of greed, inadaptability, etc...

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#7) On January 06, 2011 at 6:39 PM, Option1307 (30.66) wrote:

(2) Is Facebook a “fad” that will eventually go away?


You make a lot of assumptions when trying to make sense of a reasonable valuation for facebook, but none of them make me want to invest in an IPO.

Interesting stuff, +1!

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#8) On January 06, 2011 at 7:37 PM, Bays (29.10) wrote:

Wow, great article. 

Where do you find the time to write such informative, detailed blogs!


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#9) On January 07, 2011 at 12:17 AM, RonChapmanJr (30.08) wrote:

I was going to post a picture of my physical Facebook from my freshman year at Harvard (c/o '03) but I can't easily locate it and I'm lazy.  The reason is that the idea of having a book/website to look at new people you meet as well as friends has been around for a long time (I don't even know when the first Facebook was published) and will be around for a long time to come.  I'm not sure Facebook will be able to stay on top but I don't think it will be disappearing anytime soon.

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#10) On January 07, 2011 at 12:25 AM, tekennedy (91.00) wrote:

To throw in my 2 cents...

I'd say there is a reasonable chance facebook is not a fad.  They have network effects, where the more users are enrolled the more benefit someone gets from joining making it so that there will normally be one dominant winner.  To combat the "this is the next myspace" arguement: Facebook is bigger.  They used to be close but simply put Facebook won that head to head battle (link:  Will they need to defend their position?  Absolutely.  Will it be easy for a competitor to go against them? No.

Another comment absolutely worth mentioning: have they done an effective job monetizing the site?  An emphatic no!  I hadn't heard the revenue stat before but assuming its true...Based off of this ( data the company makes...

-$4/user/year (slightly rediculous considering the massive amount of time the average user spend on the site and how much the company knows about the user)

-$.015/hour a user is on the site.

If the company is well managed (very big if) they can make their site the go to source for almost anything online, like a yahoo only with better growth.  I wouldn't be surprised if 10 years from now everyone used Facebook to download music/movies/ software. 

This being said I wouldn't touch it at this valuation as that assumes half of what I said happens + strong growth.  With 500 million users they'll need to give away computers and internet in third world countries to maintain growth.  I'd gladly pay up to 20 times earnings for the potential thats there.  Over 100 times earnings? Just say no.

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#11) On January 07, 2011 at 9:27 AM, MKArch (99.82) wrote:


I'd seen your name around CAPS for a while but never paid much attention. I think your recent home builder blog was the first time I read your work but I've been going back through your older blogs and for what it's worth you are my absolute favorite player on CAPS. I'm sure you get plenty of accolades from others but I can sincerely say it's people like you that turn CAPS from a competition to a learning experience. I'm probably speaking for a lot of people but I thank you for your contributions to CAPS and my growth as an investor in training.


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#12) On January 07, 2011 at 11:05 AM, SkepticalOx (98.56) wrote:


This was my first thought as well.  If I were Zuckerburg, I would sell, take the money and run.  He'd have more money than he could ever spend, and he'd not risk looking like an epic failure in his quest to become the next Steve Jobs.  Don't want to be noted in every business textbook going forward as an example of greed, inadaptability, etc... 

People said the same thing when Zuckerberg turned down a $1 billion bid from Yahoo to purchase Facebook. It's only a fad. 

I think a lot of critics said the same thing about Google. I mean. Really. All you had to do was change the URL and woila! Wait... $200 billion market cap?

In time spent on a website, Facebook is the number one site out there. The information its users posts up voluntarily is like fishing with dynamite for marketers. So really. FB has the potential of making it really really big.

He's not in it for the money alone either.   

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#13) On January 07, 2011 at 11:57 AM, Pennyperson (< 20) wrote:

I'm probably speaking for a lot of people but I thank you for your contributions to CAPS and my growth as an investor in training.

Amen to that..I've learned alot from Jakila!!

And Facenook...I refuse to be apart of it. To many suspicious in this world and I don't need some other entity "other than what we already have" hacking into my personal life.

And I wouldn't buy into Facebook for that very reason - if i don't like a company - I'm not a buyer

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#14) On January 07, 2011 at 11:59 AM, Pennyperson (< 20) wrote:

For the record _ since TSIF comment yesterday. I'm not suggesting in anyway that FaceBook would be the ones hacking.

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#15) On January 07, 2011 at 1:25 PM, ajm101 (< 20) wrote:

It's probably overvalued by $30B.  A $25B cap makes sense on a blended valuation using P/S (10 multiple, $2B current revenue) and a PEG of 1.2 (assuming 50% annual grow over the next 5 years, $0.5B current earnings).

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#16) On January 07, 2011 at 1:41 PM, ajm101 (< 20) wrote:

I just read to the end, and found we reached similar destinations by very different routes.  Funny.

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#17) On January 07, 2011 at 2:04 PM, SkepticalOx (98.56) wrote:

The thing is, I don't think Facebook has fully exploited the potential of what it can offer to marketers. It can squeeze more $ out of advertisers per user. My company has used Google adwords for years, but we have yet to look at Facebook, it is not out of the question that it's revenues and profit could be similar to that of Google's (eventually), if not even more. 

Honestly, for companies like Facebook, I don't think normal fundamental analysis using DCF models is that useful. Some of these companies trade at ridiculous multiples and increase multiple-fold before anything makes sense in the usual sense.

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#18) On January 07, 2011 at 2:24 PM, ajm101 (< 20) wrote:

I think the biggest risk to a low-ball valuation is exactly what SkepticalOx wrote.  It should be interesting what kind of strategy (I assume FB is going to offer an ad platform similar to Google's) advertisers will prefer - paying for presence based on the social graph or the information graph?  Even that assumes that Google and Facebook won't start encroaching on each others' territory.

The one reason that I don't agree that FB could see a GOOG like cap is that I think the online advertising market is not growing fast enough for it to do so without taking a substantial piece of GOOG's pie, and GOOG is a non trivial competitor.  More likely FB tries to take on GOOG, GOOG responds strongly, and both their market caps take a hit (say both go to $100B, which would only offer a double to GS investers getting in on the SPV).

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#19) On January 07, 2011 at 2:46 PM, SkepticalOx (98.56) wrote:

#18 The online advertising market is not growing fast enough? In the U.S., which is probably one of the most developed markets, is still growing at a CAGR of 25%. Include international markets where there may be even more potential, and I think there is still a lot of room for both Google and Facebook to grow in. 

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#20) On January 07, 2011 at 3:43 PM, JakilaTheHun (99.92) wrote:

The interesting thing here to me --- I view LinkedIn's business model as much more sustainable since the user base has a financial interest to be there.  That doesn't make it foolproof (there's always "something better" that could come along), but it certainly makes it less vulnerable to little trends.

Would be interesting if Facebook had the brains to try to muscle in on LinkedIn's turf.  That would provide it with a bit more of a solid long-term moat.  

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#21) On January 07, 2011 at 4:16 PM, ajm101 (< 20) wrote:

#19, don't get me wrong, the market is growing like nuts, but I don't think there's enough online ad spending total ($25B domestic, right?) to support two $200B companies right now.

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#22) On January 07, 2011 at 4:50 PM, blake303 (28.55) wrote:

I do not believe LinkedIn is a good comp, not that there is anything truly comparable to Facebook.  I use both sites and visit Facebook dozens of times for every LinkedIn visit - and I am in the process of looking for a new job. I also spend hours on Facebook for every minute I'm on LinkedIn.  I tend to side with SkepticalOx on this one. Much of the commentary on this post is eerily reminiscent of Google valuation criticism pre-IPO. I don't think the monetization model is that hard to grasp, as it is the same that has been in use by TV and radio for decades. Furthermore, as absurd as it sounds, people are willing to shell out real money for virtual currency for Zynga games and other apps, which is a revenue source absent in TV and radio. I'm not suggesting a $50B valuation is not excessive, but I would not be surprised if there are a lot of people that look back at the valuation a few years from now with regret. 



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#23) On January 07, 2011 at 4:50 PM, blake303 (28.55) wrote:

#21 - No one is valuing Facebook at $200 billion

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#24) On January 07, 2011 at 4:57 PM, SkepticalOx (98.56) wrote:

Would be interesting if Facebook had the brains to try to muscle in on LinkedIn's turf.  That would provide it with a bit more of a solid long-term moat.  

Or you know, maybe just acquire LinkedIn :P 

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#25) On January 07, 2011 at 5:07 PM, JakilaTheHun (99.92) wrote:

Or you know, maybe just acquire LinkedIn :P

That would be counter-productive.  

(A) They would need a crapload of cash.  

(B) It would cost a fortune.  Probably $2 Billion+.

Facebook has better name recognition, more users, and a much better connected network to begin with, so why not just create a "Facebook Professional" site that can be linked up with a regular Facebook account.  If done right, they could basically eat up all of LinkedIn's business for a low cost. 

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#26) On January 07, 2011 at 5:15 PM, SkepticalOx (98.56) wrote:

I thought the whole purpose of LinkedIn was it sort of seperate from Facebook. I have FB friends who have LinkedIn accounts too.

No doubt Facebook could create a Professional service that was seperate or find a way to integrate so that it could sandbox work information just to that. 

You forgot. If FB plans to IPO next year, it could acquire LinkedIn with shares. 

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#27) On January 07, 2011 at 5:20 PM, SkepticalOx (98.56) wrote:

Actually. It could do that now even no? Whatever interest in the company it gives to LinkedIn (say, 4% of a $50B firm), the fact that LinkedIn is under FB's roof could boost valuation higher than the cost of the shares, and LinkedIn owners have upside potential too holding FB shares.

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#28) On January 07, 2011 at 5:28 PM, blake303 (28.55) wrote:

I don't view LinkedIn as a social network, more of a database for keeping track of old ex-coworkers. It can also be used to research people you may interview with, but that is of limited benefit. Job sites like Indeed are far more useful for job seekers as well. LinkedIn is a virtual rolodex that is available anytime you are at a computer, but in my experience there is very little interaction on the site. Furthermore, if LinkedIn is valued at approximately $23.50 per user, I don't think valuing Facebook at $90/user is that unreasonable given the frequency and time per visit.  

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#29) On January 09, 2011 at 1:49 PM, Valyooo (34.54) wrote:


I know this is off topic but I am trying to make...I guess you could call it a type of manual...for myself, to refer to when analyzing different sectors.  I am asking who I consider to be experts at different fields what to look at in those fields.  For instance, sinchi told me what to look for in mining, babo for dry bulk, sockmarket for railroads, etc.  I know you are the bank guy, so can you help me out?

So far, I have this:

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1. How well-capitalized they are: look at all the capital ratios and such (which ones should I be looking at?).  Check for  dilution

2.  Are deposits growing?

3. How's the net interest margin looking? The wider the spread, the better. 

4. Which direction are NPLs (non-performing loans) going?

5. What is the loan portfolio of the bank and what are the risks associated with each type of loan?

6. How safe is its bond portfolio? I've been led to believe banks often hold extensive fixed-income portfolios - there must be sovereign debt exposure there.  Specifically for a bank based out of Spain, I'd think it would at least hold some Spanish government debt.

7. Whats the net tangible book value?  Under 1 is a bargain, sell when people get greedy and it gets close to 2.

8. Hows the dividend?  Is it bigger than its peers?  Hows the payout ratio?

9. How did it do during the last economic downturn?

10. Whats the interest coverage


Also, I am a fundamental analysis noob, so I have a question that I thought of when reading your Discover Financial blog (I spent about the last hour reading your blogs from 08-09).  I saw that for discover, you said the fact that they had like 11B or whatever it was in liquid assetts meant they could absorb a nice chunk of losses.  However, they had about 3x liabilities as they had assets.  So how come that didnt make them OVERvalued?  If you have way more liabilities than assetts, why does it matter that they have a lot of liquidity?  Is that simply so that they can stay solvent for long enough until their earnings recover?



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#30) On January 09, 2011 at 1:53 PM, Valyooo (34.54) wrote:

Also, where exactly do I find the loan portfolio, bond portfolio, NPL's, and deposit growth on the 10-k?

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