Apple's P/E ratio is 13.12 [1].
Facebook's P/E ratio is 107.66 [2].
The P/E ratio[3] is:
market price per share / annual earnings per share
This basically means that Apple makes as much profit as their are valued at in 13.12 years, whereas it would take Facebook 107.66 years to afford to buy themselves.
That doesn't make any sense, and if we assume that their P/E ratio should be roughly the same, their stock price should be around [4]
33.54/(107.66/13.12) = 4.09 USD
Edit: Google's P/E ratio is 18.32, and if Facebook were to have the same P/E ratio its stock price would have to be 5.71 USD [5].
Amazon also has a multi faceted business model. Distribution, SaaS and PaaS offerings, Hardware sales, and probably some more I'm overlooking.
Facebook sells ad space to people on their chat platform that have little to zero intent to buy. The last time I saw a company (AOL) try to stuff ads in a chat client... well we all know how that went.
I don't understand that at all. I assume your point is that Google only makes money from "ads", and that makes it a single source of revenue despite being well-diversified advertising products across a big segment of the tech industry (Youtube ads aren't the same as search ads, which are different from Android ads, etc...)
But... how is facebook any different? They have ads. And... more ads, as far as I can see. What's the "more than one" source of revenue you're referring to?
Facebook has ads and Facebook Credits. S-1 shows about 18% of Facebook revenue comes from Facebook Credits, so Facebook is better than Google in "diverse source of revenue" metric.
That's fair; I didn't realize the fraction was so high. So, I guess the question then would be do freemium sales by affiliated apps constitute a meaningfully "diversivied" revenue stream? I'd argue that they don't, honestly. Downturns in the market that reduce eyeballs will hit them both. Both scale more or less directly with disposable income in the facebook user demographic.
Normally you talk about diversification in the sense of risk management: i.e. "It's OK if the social media market tanks because we still sell phone service." (or whatever: hardware, concert tickets, coal mine permitting services, etc...).
From that perspective, both Facebook and Google are very exposed. Though if anything I'd still say that Google is better situated due their presence in pretty much all of online advertising. As long as there is anything worth advertising to someone on the internet, Google has an answer for that.
Google sells Hardware, Software, SaaS, PaaS and Ads.
HW: Google Search Appliance, Google Nexus
SW: Google Earth Pro, Google Sketchup Pro
SaaS: Google Docs for Business, Google API's (Maps, Google+)
Paas: Google App Engine
Ads: Google Ads
I know that 96% of GOOG's 2011 Revenue came from Ads, but GOOG is at least trying other markets. I personally wouldn't be surprised if FB released a phone.
>and it still generates $4b p.a and climbing, imagine how good they would be if they actually figured this stuff out
Please also consider a counter case, what if $4b revenue i.e. roughly $4 per user per year, is the best you can have for such a product. And the potential for growth of no. of users is not high, then what?
... it would take Facebook 107.66 years to afford to buy themselves.
Only if their earnings were constant for the next 107.66 years. People expect Facebook's earnings to continue to grow. Apple's earnings, by contrast, are considered mature.
Facebook's earnings are via a controlled ecosystem. You can't maintain higher profits that way. You can have short-term higher profits that way - just not maintain them.
It's not about whether they can be considered an "upstart" it's about whether speculators think they have the potential to make much more money than they already do. Amazon for example has been around for 2 decades and have a PE ratio of 179 because they've put nearly all their profits into investing in new businesses that has a lot of potential to make more money down the road.
Do you think taking the Facebook PE and comparing it to Apple is some major revelation that investors, or most people who read a newspaper, do not know? Every FB thread on HN has somebody pointing out PE, and then a thousand responses on what is wrong with that argument. So lets do it again.
The PE works out to be so high because there is a growth expectation from Facebook's one billion users. All that it says is that the market believes the chances that Facebook will be able to grow revenue, and in the future, profit, is very high.
PE is not an accurate indicator of the value of this stock. PE is used to compare mature yield stock, the type that all those Warren Buffet books talk about. With Facebook still being a young company the numbers to track are revenue growth and price/revenue.
The PE works out to be so high because there is a growth expectation from Facebook's one billion users. All that it says is that the market believes the chances that Facebook will be able to grow revenue, and in the future, profit, is very high.
Just to pick a nit. To date Facebook's P/E is high because Facebook said so. Facebook's value has never been set by an open market until about 3 or 4 hours ago.
Its P/E isn't mean to be an indicator of value, its shows the markets expectations of growth. And I think a lot of people are interested to see if the "market"'s expectations are inline with their own - and to that end P/E is great.
>Just to pick a nit. To date Facebook's P/E is high because Facebook said so. Facebook's value has never been set by an open market until about 3 or 4 hours ago.
Not an open market, no, but a market nonetheless. Anytime a company takes a funding round, whether from a single incubator or a dozen VCs, the transaction implicitly prices the company pursuant to growth expectations. (And that's not even mentioning Facebook's heavy trading in SecondMarket.) Just because a market is restricted and low-volume doesn't mean it doesn't exist; any time a transaction occurs, you'll find a market behind it.
No, Facebook's P/E has been high because people having been willing to buy the stock at a high price. Facebook can't dictate what price other people are willing to pay. It's always been set by the market, from day 1.
I disagree - though I concede its a semantic argument (and I wasn't referring to its private sales - which is valid), but the $38 price was dictated by FB and propped up (artificially) by MS it was not market set. I think that's reinforced by the drop we've seen today when the underwriters aren't there to prop the price up.
You've failed to factor in growth rate. Your calculations for how long it will take to earn back the share value are assuming no growth in EPS over that timeframe.
I wouldn't be surprised if Apple's EPS growth outpaces Facebook, but these numbers are completely meaningless until you at least make a stab at adding in projected growth.
I'd be more than happy to know "your" expected growth rate. Facebook has not disclosed its business plan, views on the online ad market, ongoing capital expenditures and working capital needs.
Who's failed to provide future growth information is Facebook, not the other way.
More importantly, the Tech audience keeps looking at P/E as a valuation metric, but what rigorous and top asset managers do is look at Free Cash Flow to Equity, not Net Income. On a FCF to Equity valuation, FB IPOed at +220x.
Even at a generous P/E or FCF/E ratio of 25x, Facebook's Free Cash Flow needs to go from $450m to $4,000m in the next 24-36 months. Do you think that is possible? After looking at their infrastructure needs I think not.
I think it's you who has failed in the calculations.
How can I fail in the calculations when I didn't offer any calculations? All I said is that if you're using P/E ratio as a metric without a growth rate, you're doing it wrong.
WillyF, the last comment was a big aggressive to you to bring home the point, but I believe the main point was that even with generous predictions on their future business plan (which as far we all know doesn't exist) that facebook is overvaluated by, well, a lot.
There's no reason to assume their P/E should be the same. P/E is only one of a range of ways to compare company values, and there are lots of reasons (growth, risk, etc) why the P/Es of two different companies might differ. I don't agree with FB's valuation, but the argument has to be more complex than simply comparing P/Es.
P/E ratio can also go down if annual earning per share increases. I think it is too early to comment on that. They have HUGE user base and I hope they have a good chance to increase their profit. Lets wait and see :)
This whole argument is asinine. You need to consider that each company is floating a different number of total shares. Buying one share in FB and one share in Google would not grant you an equivalent stake in each company. You need to see how many outstanding shares each company has on the market (and what fraction of the company is public).
For your purposes (comparing valuations between two companies), it would make more sense to compare market caps.
P/E ratio does already correct for number of shares: it's a ratio of your share's price to your share of the company's earnings, based on the percentage of the company your share represents. Alternately, if you take totals, it's market cap divided by earnings.
I've always been baffled by stock splits (and those calling for them) for this very reason. I suppose it makes sense for BRK.A's $120k shares, but for AAPL?
Stock splits are an interesting discussion. Other than psychological differences, a split really only increase liquidity and encourage more small investors but it also encourages more short term speculation. Berkshire is happy to continue to cater to the highest class of long term investors with the added benefit of being noted as the highest priced stock in the NYSE. Although, they did recently do a large split of their class B stock to allow more trading and to be included in the S&P 500.
Looks like FB priced it perfectly - they made the maximum money they could out of it.
Was it not obvious in advance that FB was being priced such that the shares would be either flat, or decrease? The original investors have made themselves a fortune - and frankly anyone who invested heavily in a corporation at a P/E of 100:1 didn't think about it well enough.
Anyone who invested doesn't care that it's down 8% today. Facebook's investors have always done extremely well, however, it appears that traders with a two day sell window have done extremely poorly.
I don't think they priced it right, a $30 sell price could have created a 13% bump today, a big gain on opening day can create demand from retail. It changes the whole story, Facebook should know well enough the social effects of perception, even though the fundamental story is the same. The idea is not to cash out on IPO day, it's to create a story of growth and success and then cash out a few days later as the growth has whipped investors into a frenzy.
It reminds me of my realtor who would put houses on the market extremely underpriced generate huge amounts of interest. A bidding war would ensue almost immediately amongst those emotionally attached to the 'great deal'. After the bidding war the seller would have an offer 25 to 30% higher than market. The internet equivalent is $300 ebay items listed for 99 cents. Facebook fucked the IPO up by failing to generate interest through a success story, it will recover though.
Honestly, if you're 'investing' for two days you're not interested in P/E but rather technical analysis and market sentiment, both of which are poor right now, as nothing fundamental about Facebook's business has changed in the last week.
I disagree. If I understand things correctly, the purpose of the IPO is to raise capital for Facebook. As such, if they sell the stock for $30/share, that's what they get. If the stock then goes up to $34/share, they don't get the extra $4. That goes to whoever bought it from Facebook and resold it. In effect, they would have raised 12% less than they could have.
On the other hand, if they sell the stock to the public at $38 and it drops down to $34, it's someone else that's out the $4. Sure, it may create some temporary negative publicity, but, as you stated, they will recover.
Kinda, I'm assuming that a portion of the IPO stock was from entities that owned the stock other than Facebook, eg. employees, early investors, etc.
If not those shareholders may also want to exit shortly after the IPO, creating a success story for the IPO should increase demand creating a better market for shareholders.
I do agree with you that in a market with rational agents and solely from the POV of Facebook, Inc. that they did the best thing, but I think in a market filled with irrational agents motivated primarily by price movements that it creates the wrong story for the next 3 to 6 months in the overall social context.
What they've created is dinner conversation about how Facebook is flopping and has provided lots of ammunition to the nay-sayers, rather than 'proving' the nay-sayers wrong.
I tend to see Facebook's business fundamentally as hype, people use it because other people use it, not because of some intrinsic thing that makes it better than any other social network. It's moat is it's userbase not it's technology.
It's like Coca-Cola, people drink Coke because other people drink coke, not because it tastes better than Pepsi. It's the fundamental reason why New Coke was a flop and Pepsi taste tests don't matter.
Look up what an IPO is. It is an investment round, not a sale of personally help stock. Most shareholders are forbidden from selling during the IPO period. And in FBs case, they would have gotten better deals on secondary markets before the IPO.
Mark Zuckerberg doesn't care about the Nay-Sayers. He's made it quite clear that it's his company, and he'll run it how he likes. He just got a huge wodge of money, and he can now spend it however he likes. A win all round, I'd say.
I really don't understand the investment here; it's a non-voting non-dividend share right? I've asked a few people to explain this without satisfactory answer; there is now absolutely no possible connection between the success of the company and the value of these stocks (unless Zuck decides to sell at least 7% of his 57% ownership, which seems like it will be approximately never) except that all the owners decide their stock should be priced relative to how well the company is doing and other people agree.
It seems like people are investing in what other people will be willing to buy this otherwise useless stock at, and those people are only willing to do it because of yet other people willing to buy it for the same reason. Is that not correct? Seems like an extremely bizarre form of "investment", it's betting on a horse, not owning a portion of a horse.
"It reminds me of my realtor who would put houses on the market extremely underpriced generate huge amounts of interest."
Different situation. Pricing the IPO lower (as others have pointed out) would bring less money to facebook. And of course in the case of real estate there is no obligation to sell even if someone offers the asking price or even over the asking price.
> The idea is not to cash out on IPO day, it's to create a story of growth and success and then cash out a few days later as the growth has whipped investors into a frenzy.
Facebook is in for the long haul. This IPO gave them a hefty bit of cash - we probably won't see the results in full for years to come.
Of course, Facebook and its original investors made out well. But a stock that immediately falls below its IPO price represents a failure of the underwriters, not of the company itself.
Basically, Morgan Stanley convinced a whole bunch of its most favored clients to buy a stock at $38 that was worth only $33 or whatever. Those are the people who got "ripped off", so to speak.
Morgan Stanley makes a ton of money this quarter, while telling their customers that they should stay in for the long term (5+ years). It is too bad those people are getting screwed by Wall St. But a fool and his money are soon separated, or whatever that quote is.
On the other hand: MS also spent ~ $3B providing a floor on Friday by buying up FB shares in the open market. Since FB is down 11%, they've already lost about $330M on that. Not chump change even for MS.
> On the other hand: MS also spent ~ $3B providing a floor on Friday by buying up FB shares in the open market.
You don't understand the greenshoe: MS didn't spend a dime. That money came from selling initial shares from the "overallotment". Essentially, suckers who paid too much.
If the price had stayed above the IPO, that money would have gone to FB. Since it dropped below, MS is plowing the money (on behalf of FB) into manipulating the share price.
The shares they bought were just to cover their short position. They didn't loose a bit, they just didn't profit even more (which they would if the share price would go up).
You mean they would profit more if the price would go *down? The way I understand it, you make money on a short when the price goes down because you can buy back the shares you shorted at a lower price.
No, see the link in the comment below. If the shares go up, the underwriter can close his short position by buying a number of shares from the IPO company, at the IPO price (which is below the market price), therefore effectively profiting.
> Was it not obvious in advance that FB was being priced such that the shares would be either flat, or decrease?
Funny thing: All IPO's are priced by the sellers. If they get it right, all of them should have prices which then stay flat or decrease. It is the buyer's interest for the price to increase, a fact that seems to have been forgotten since the bubble V1.
Maybe now people will again recognize the IPO for what it is: A company begging for money.
FB only released not even close to 1/2 of their stock. The investors are still stock rich and won't sell off their shares yet. If they did, the price would tank to less than $20.
The investors will cash out, but they'll gradually release the stock to the public.
The problem is that the sheer number of shares that need to be bought won't have enough humans in our population to buy it at the price. So you're going to see this stock gradually tank as investors dump their shares into the public.
It's really a legal ponzi scheme - Facebook only makes less than 1B in real revenue and their cap is riding at 90B and falling.
Companies are allowed to carry high P/E ratios because they've recently undergone a period of exponential growth and people believe they can continue to execute at the same pace. Amazon (amzn) is the perfect example of a stock that continually exceeds people's expectations while carrying a high P/E ratio -- and the stock has responded accordingly.
From listening to Zuckerberg I think he's a true capitalist, more interested in creating long term value than making a quick buck. I'm sure he's not excited that some very hopeful people who believed in his company are hating him right now because his stock (temporarily) seems over-priced.
Problem is, when you hit 1 billion users, you've run out of "exponential growth" headroom. All you can do is multiply that by 6.5ish (therefore, linear growth), and even finding new sources of revenue doesn't get you exponential anytime soon.
Certainly, most future growth will come from extracting more cash from the pool of users (or people selling to them), not growing the pool.
I agree that most future growth will come from extracting more cash from their current pool of users, but I can imagine a situation in which new sources of revenue would lead to exponential growth.
The world economy has never seen anything quite like Facebook before -- that's why it's so exciting. They could become Google/Netflix/LinkedIn/Zynga combined. I'm not saying they will, but they've got the prerequisites: 1 billion active users.
Facebook has pretty accurate data on 1 billion people. They have not even scratched the surface of how they can monetize it. Think about the equivalent of Google Adsense, syndicated across the entire world wide web, but targetable by detailed and fairly accurate demographic and psychographic profiles. Now layer in the social elements to help marketeres "earn" impressions.
There is a fairly strong chance they will own an enormous % of market share of ALL online and mobile display advertising in the near future.
User count is only one dimension of the value that Facebook has. The user connections are arguably the more important dimension.
As Facebook figures out more ways to be a more pervasive force in people's lives, they'll have the ability to multiply the revenue they receive on a per-user basis.
The problem is that Facebook's primary asset is users. They're making money off of them(approximately $1/user in profit and $3.5 in revenue), but it's not clear if they can make exponentially more per user.
They certainly can't expand the user pool by that much, which means that they need to find a way to monetize their existing users more effectively. I think that Facebook can certainly make more/user than they currently are. $5, maybe $10/user is possible. But $100? I don't think so.
Hard to imagine exponential growth in what either users or advertisers are willing to pay. An analogy to FB as a user service might be, say, MMORPGs like WoW. They seem to exhibit early exponential growth due to peer pressure. Yet they are never priced more than $10 - $15/mo. Often they start out as a subscription service and then move to free-to-play.
So then are advertisers willing to increase their FB advertising budgets exponentially? Does FB have something coming down the pike on a regular basis to make that happen?
Those who are already not on facebook are either too poor to make FB significantly richer or care enough about their privacy that that they have chosen not to use FB.
Oh, I'm sure he wants to grow the company and make it successful. And I'm sure that he will do, he's shown the ability to make it happen.
I don't, however, think it will ever live up to the price they floated at. I suspect that Facebook will be a successful company worth about a third of what they launched at.
There are two problems with facebook's P/E. The first is that it's questionable whether they can grow revenue enough to justify such a figure. They can't grow their userbase by a factor of 10 because there aren't enough humans on Earth. And they have a huge roadblock in terms of further monetizing individual users. Ultimately investing in facebook isn't a bet that they'll keep doing what they're doing now (as it is with amazon or apple), it's a bet that they are going to fundamentally change everything about how they advertise and somehow garner a huge increase in per user revenues.
Second, facebook stock is already priced at a level where it's expected they'll be taking in a huge percentage of total worldwide ad revenues. Where can it go up from there? There isn't much reasonable headroom there, which makes it a very poor stock to hold on to.
Because stock value, after you've gone to the pay window / sold the initial amount to make your investment money back and make money for founders, doesn't really matter to the founders / investors. They know that it's not tied to any real internal metrics. Stocks are a game. Game for the economy when people who don't understand are better high-risk and don't have a clue about internet evolutions / the cycles online. Facebook took advantage of that. Smart? Sure. Abusive? Yup - though they haven't shown much care for what they do to users/consumers anyway.
This seems like a short-sighted outlook, as it ignores the fact that the stock price matters to employees who have been given shares as incentive, and it also matters for the company's ability to raise money via selling shares again in the future.
Hm. But for an employee with stock (they have a six month lock in selling) there is really no difference in
1) FB making IPO at $30 and rises to §33 second day or
2) FB rakes in $38 and falls to $33 on second day.
Facebook only gets the IPO money. If the shares double on opening day, it's a sign they could've made a lot more money (or given away less equity for the same amount of money).
> No they didn't. They would have if they had dumped all their shares the first day, which they did not.
I'm talking about the money Facebook made off the IPO shares, not the net worth of Facebook employees.
> Zuck's net worth may have dropped 10% this morning (depending on how many shares he sold yesterday).
Changing the IPO price wouldn't have changed that. If they'd opened at $15 and popped up to $35, Zuckerberg's net worth would still be the same as it was when it opened at $38 and dropped to $35... but Facebook itself would've gotten much less money out of the IPO.
i agree the 51% that has been retained is there so that he can retain control, he doesnt actually care if it tanks , his made a huge wad and still has command, perfect!
CRM has been trading well in excess of 100 P/E for almost 3 years- and they were negative last quarter- yet everyone that owns an S&P 500 index fund owns some of that. Maybe that's your point though, diversify...
But the employees who were promised shares at a $100 billion valuation (which probably happened since 2 years ago), won't get that kind of money. They will get whatever Facebook is worth a few months from now.
He also rented out theatres so that his employees could see The Social Network on opening night - a movie that puts him in a decidedly unfavorable light. Saying that he "screwed over pretty much everyone he's ever worked with" screams of someone who doesn't know what they're talking about.
Keep in mind they didn't sell all of the company, only a fraction of it. The biggest shareholders are basically the same as before the IPO... the idea is not to price that one day to perfection, it's to maximize the value over a period long enough to unwind the rest of your position in the secondary market. If you IPO a company and the IPO "busts", it reduces investor demand for shares when you actually try to sell the rest of them out into the market.
Not wrong. Facebook and the investors that sold stock in the IPO got $38*the number of shares. Whatever happens after the IPO is essentially irrelevant to them, except their remaining shares have gone down in market price. That probably doesn't hurt much if you realize that a day earlier there was no market price, and you got a great deal on the shares you did sell. Morgan Stanley is probably also not being harmed in this transaction (see http://en.wikipedia.org/wiki/Greenshoe ). They do have reason to support the IPO price level. Otherwise, it will be much harder for them to find investors for the next Internet IPO, which means lower prices, which means lower underwriter fees.
The people on the wrong end of the deal are those that bought Facebook shares pre-IPO or in the hours after the IPO. The people on the right end are all early Facebook investors selling shares and the underwriters.
You are basically admitting that Zuck didn't build a valuable company, but instead he conned investors (and Main Street) out of billions (coming days and weeks will tell exactly how much). So, congratulations to him I guess.
There's no con here. Anyone who bought at the open price had all the information they needed to make an educated purchase of the Facebook stock. I'm not an institutional investor and I looked at the P/E of 100 and thought it would be kind of silly to buy at that price and many others here seemed to think the same thing.
Zuck has built a valuable company - its just not $100B valuable. But a $25B company isn't peanuts.
Agreed, but it turns the stomach a bit to read the FB fanboys slapping each other on the back about FB being a "$100B company" (and that the IPO "proves" it).
FB scored a win by getting $100B, but in my opinion it's tainted, and they may have poisoned the well for those who follow.
I remember having a discussion with another programmer friend of mine, after the Google had had their IPO. At the time the friend was working in the networking software area, and had not much clue on the Internet side.
The topic was Google vs. Microsoft. I was telling him that Google is going to beat MS. His response was but Google is just search!
Anyway, the reason I mention this is that for GOOG IPO, some very smart Alexes of the world were not cued into to the buzz. Apart from Internet enthusiasts and professionals.
Now move forward Facebook IPO. The other day, my young, just-out-of-teens, female cousin was announcing on FB, that she has pre-ordered some buy.
To cut the story short the fools were already in !
PS: Not to disrespect my cousin. Using the 'fools' word in the context of those famous sayings regarding fools entering the market, just at the time of the bubble
To me, Facebook's social network is extremely overvalued. When I search on Google, they are getting first party accounts of subject which interest me, which turn out to be pretty good in the ad space. When I (or my friends) post on Facebook, Facebook gets my demographics, but I am more likely to talk about friends or family than try to find a product or a domain of knowledge.
Ads work better when I know a lot of specific things about you. As much as people post on Facebook, I have a hard time believing that Facebook knows much more about people than some locations and general demographics.
And this is why Google+ is so maddening. They have no clue how to build a social network and they aren't even trying. The people who use it are mostly techies who use it as their third social network after Facebook and Twitter. Circles was a neat idea, but wasn't promoted sufficiently. The vast majority of the time I personally use Google+, it's for the hangouts, which are great. But even that part of the site is fragmented. There's hangouts (which has the most features), and hangouts with extras (which doesn't, but you can name a hangout and keep a static link).
Meh. The state of social networking is very much up in the air right now. Seems to me that there's a lot of value being wasted by not appreciating what people actually want, and turning that into value.
Why anyone would buy FB at over 100 P/E is beyond me. The general sentiment of the buyers is that "Facebook COULD earn a lot of money". When has that sort of line ever worked for startups? If a startup says something like that, everyone asks "Well why haven't you yet then?"
Small businesses/startups on Dragon's Den get laughed out the room when they try and broker a price based in part on the 'potential' of their business. Why is it different for Facebook?
Amazon, of course. They were widely laughed at too. I remember the favorite joke of the people who used to ridicule them: "we lose money on every transaction and make it up in volume".
"When has that sort of line ever worked for startups?" When pitching to every tech VC and angel investor ever. It's assumed that "home-run" startups are going to be chasing large potential markets.
I wonder what recently hired employees have for their strike price.
It must feel terrible to be underwater the day after IPO, if that's the case for anyone. I was at Amazon after the dot com bubble burst, and it was very hard for managers (who mostly had already done very well) to keep morale up amongst the later hires.
Of course, the people who stayed are all doing quite well now -- but it took a decade of patience.
Facebook hasn't issued stock options since 2007. They now issue restricted stock units (RSUs) which don't have a strike price. You cannot be underwater with RSUs.
Once a stock option vests, its future value is irrelevant, since one can simply buy the stock at market price if the option is underwater. The option only offers a small hedge against volatility.
Investors that felt privileged to own FB weeks pre-IPO thought the stock would go viral because everyone was talking about it. Fortunately, FB users and TDAmeritrade users are completely different demographics and even small time investors know not to confuse social clout for economics.
Facebook is a story stock [1] if I ever saw one. According to the WSJ it's the most traded IPO of all time. I imagine a lot of people who use FB but know nothing about stocks are buying and selling it. I expect it'll take a while before people start to settle into similar expectations about how it's going to perform in the long run.
Everyone's looking at Mark Zuckerberg right now. If his team continues to execute at the pace of a startup the stock will go higher. However, if he starts to show signs that the pressure is getting to him (think Google's failed attempts at social or Nflx's Qwikster snafu or the past 10 years at msft) the stock will fall.
Hmm... it's interesting to watch. I know a friend who put almost his life savings into this, I told him it was crazy and I told him this would happen listing reasons. But he seemed sure it would climb...
trading doesn't cease just because a stock drops. they ceased on Zynga because the bots got out of hand and caused a flash crash. these safety measures have been in place since the big flash crash of a few years ago. FB looks more like an orderly sell off
I literally tried to submit this exact thing about an hour ago and it prevented me from posting a duplicate. I had to dig out http://news.ycombinator.com/item?id=4002633 to post it. What exactly is the rule regarding duplicates?
I posted the link half an hour before this post. Why did this post go through? My post, same url, was considered a duplicate of a post from last friday.
I looked at the market cap of linkedin ($9B) and then compared it to Facebook (~$92B). I know the two companies are different, but i feel that 10x value is a little out of wack...just my opinion. I wouldnt buy yet.
This is unfortunate. Yes the company maximized their IPO take. But at the end of the day the ones who got screwed were the retail investors who bought into the media hype. This will hurt tech IPOs in general.
the interesting thing to watch will be 1) is it correct to price your IPO to reap maximum gain for the company or 2) is there enough positive PR benefit in leaving some value on the table to under price it and have it pop slightly.
I'd go with 1. The only people you help with 2 are the bankers and whoever they deem to be worthy of stock at the IPO. I'd rather help the investors who have been with the company for years.
It's not only about the bouncing price itself but it's interesting for some of us to observe the evolution of the biggest "startup" out there after its IPO.
So, if I understand you correctly, the owners' goal is to set the IPO price as high as possible and then to hell with the future stock price? I was always under the impression that the owners' goal is long-term growth of stock value, but of course I'm not an economist ...
The owner(s) of the company only gets paid at the IPO. That's the only time he gets money from the stock market (unless and until the company issues more stock later).
So of course he wants the IPO price to be as high as possible, because that's the money he gets to put in his piggy bank.
In fact, the real goal of a public company is not to increase the stock price, but to maximize the value of the stock to shareholders. In some cases, this means maintaining a flat stock price but paying healthy dividends (in other words, giving some of the profits to the shareholders). This was actually the dominant model for many years (link below, take a look at the growth rate during the '70s and '80s).
The somewhat more recent trend toward increasing share prices is just another way of maximizing shareholder value. In this case, it is done by increasing the market value of the stock being held by the shareholders.
It is quite common for companies today to pay no dividends. Since the shareholders don't get a piece of the profits, the only way to make money on the stock is to buy low and sell high (or buy low and hold for awhile, perhaps until retirement, and then sell, however you want to look at it).
So there really isn't any intrinsic reason for a company to seek a higher stock price. The point is to maximize value, which doesn't always equate to price.
Of course that isn't going to cheer up people who hoped to buy FB on Friday and flip it for a huge profit this week after the "bump". But risk is the whole reason there's money to be made. Sometimes you win, sometimes you don't.
What? This is completely wrong. The owners don't completely cash out at the IPO. I don't know exactly how much Zuck ended up selling at the IPO, but after some quick googling I found an article from a couple of weeks ago stating
Zuckerberg, who holds a total of 533.8 million shares, would sell 30.2 million shares in the IPO — garnering about $1.05 billion in cash at the high end of the proposed price range of $28- $35 for the sale of shares.
So in otherwords Zuckerberg is worth $1 billion in cash and has 534 million shares of FB. If FB goes to zero before he sells the rest of his stock on the market, his net worth drops by something like $19 billion.
It's not completely wrong. I never said the owners cash out entirely. But in terms of the company raising money, the IPO is pretty much it.
Perhaps I was a little too loose with my terminology though, to the point of being confusing. Instead of "owner" I should have said "company" in that paragraph.
You said: The owner(s) of the company only gets paid at the IPO. That's the only time he gets money from the stock market (unless and until the company issues more stock later).
This is totally false. They get paid anytime they sell stock. They sell some stock at IPO and get paid some then. It's by no means the only time they ever sell stock and definitely not the only time they get paid by the market.
Ok, I'm obviously over-simplifying the situation, but I have hard time believing that stock price doesn't matter. If nothing else, then downward trend would generate lots of negative press and customers might turn away from the company's products/services. Imagine if Google's stock price would decline significantly in the period of next year or two - wouldn't that spell doom and gloom in people's eyes?
Disclaimer: I have never invested in any company, never bought any stock, so you may call me naive.
That's true, to a point. If Google's stock price fell off a cliff tomorrow it would be all over the news and their customers (advertisers) might have some questions. But there are two things to keep in mind:
1) If their stock price fell off a cliff, there's got to be a reason. It could be basically anything, but it has to exist and be well-known (maybe Larry Page had a breakdown, shaved his head and tried to run down some reporters, whatever). The event that caused stockholders to sell (thus crashing the stock) probably would have been enough to cause Google's customers to ask questions, the stock price is then just incidental. It's a "chicken and egg" problem in some sense.
2) Stock price really doesn't have any impact on the everyday functioning of an otherwise-healthy company. Stock price is a reflection of the buying and selling happening on the stock market, so fluctuations in price can actually have nothing to do with the current health of the company in question. Maybe tomorrow a report comes out that indicates search-based advertising will start to decline next year and will be half what is today in 2020. This would likely lead to a decrease in Google's stock price. But it probably wouldn't lead to many companies dumping Adsense, at least not yet. A report about the future affects the stock price, but it doesn't necessarily affect the customers today.
Stock prices are abstract and largely disconnected from the actual company. So while a good CEO will pay attention to the stock price, it just isn't all that important for most (especially mature) companies. Building a healthy business is the important part.
In general, if a company’s stock goes way down and that decline is attributable to bad management, then some entrepreneur can gather together a bunch of investors and say “I can run that company better than the yoinks that currently occupy the boardroom. Loan me enough money to buy up 51% of those undervalued shares, and when I take over and turn the company around, the appreciated stock will make us all rich. ”
However, FB Inc. is structured so that Zuck will retain a majority of the voting rights, even if every other investor stands against him (http://www.slate.com/articles/business/moneybox/2012/02/face...), so even if the price goes down to a dollar a share, investors’ only recourse will be to sell before it drops to fifty cents.
>Imagine if Google's stock price would decline significantly in the period of next year or two - wouldn't that spell doom and gloom in people's eyes?
Would you stop Googling things because you read a news story about their stock price declining?
(Caveat: There's some economic work that models real-world feedback from irrational "noise" trading. If you're interested in learning more I'd start with Subrahmanyam & Titman's 2001 "Feedback to Cash Flows.")
no different to raising a Series A or B. Facebook have so much cash now that they will likely never go back to the market again. They raised an extraordinary amount of money at a very large valuation.
They also have over 50% of voting control with one person so don't need to really deal with shareholders. The only single downside is employee option values and incentive packages.
Edit: to add to that, there is also a strong school of thought amongst investors that companies and CEO's who track daily, monthly, quarterly etc. stock fluctuations (ie. short term) are a lot less effective than those who ignore the short-term movements. Facebook said as much in their S1, and Zuck in his letter, that he won't be following the stock or dealing with the market, but will rather focus on building the company long-term.
>to add to that, there is also a strong school of thought amongst investors that companies and CEO's who track daily, monthly, quarterly etc. stock fluctuations (ie. short term) are a lot less effective than those who ignore the short-term movements. Facebook said as much in their S1, and Zuck in his letter, that he won't be following the stock or dealing with the market, but will rather focus on building the company long-term.
Yes, this is much closer to my thinking and that's why I called you out on your argument.
to clarify, he only doesn't care about the price after he has sold billions of dollars worth of stock. until Friday, he definitely cared (to the point of borrowing money to buy a house so he wouldn't have to sell an extra share).
They watched as all the other tech IPO's of the time had the large pop in the first day of trading. that incease in price goes to the banks and the company "misses out" (since fair value was higher in the public market).
Google tried to minimize that pop by ditching the traditional underwriting style and roadshow and instead implementing a dutch auction for pre-IPO shares. the banks were so upset at google attempt to sideline them from the process that they ended up colluding with each other (allegedly) to fix the price.
(The process was that after the roadshow, each bank would submit a sealed bid with their price and purchase allocation. The auction system[1] worked by allocating by highest price and allocation backwards until the entire allocation was sold. Somehow most of the banks bid within a few dollars of each other and at a price that was below even the lowest price estimates).
Price ended up popping in the first day, week, month, Google missed out anyway.
Facebook co-opted a number of underwriters and was in a position to leverage itself a good deal (1.5% fees instead of 5-7%), did a large roadshow and took orders the traditional way. Because they pitched the stock so well they both got a higher price than expected and also raised and sold a lot more shares than was expected.
They ended up doing what Google tried to do but without the arrogance (I guess you could say that). the underwriters for Facebook got a raw deal, they had their fees slashed, they had to share their fees with a group of other underwriters (there is usually one main and 2-3 secondaries, this deal had morgan stanley as a lead and heaps of others). They ended up sharing $175M in fees and have underwritten billions in stock and have today seen 10% of their position wiped out.
credit should go to David Ebersman, the CFO - he planned and organized the whole thing and apparently wrote all the filing docs himself. turned out to be a great and critical hire
The P/E ratio[3] is: market price per share / annual earnings per share
This basically means that Apple makes as much profit as their are valued at in 13.12 years, whereas it would take Facebook 107.66 years to afford to buy themselves.
That doesn't make any sense, and if we assume that their P/E ratio should be roughly the same, their stock price should be around [4] 33.54/(107.66/13.12) = 4.09 USD
Edit: Google's P/E ratio is 18.32, and if Facebook were to have the same P/E ratio its stock price would have to be 5.71 USD [5].
[1] http://www.google.com/finance?q=AAPL
[2] http://www.google.com/finance?q=NASDAQ:FB
[3] http://en.wikipedia.org/wiki/PE_ratio
[4] https://www.google.co.uk/search?q=33.54%2F(107.66%2F13.12)
[5] https://www.google.co.uk/search?q=33.54%2F(107.66%2F18.32)