This Reuters article says Facebook's revenue doubled to $ 1.6 billion in the 1st half of 2011.
Net income was almost $ 500 million over the same period.
Estimates of the previous year's earnings have ranged from $ 400-600 million so it appears that Facebook has roughly doubled its earning power year over year.
Some expect when Facebook goes public early next year its valuation will approach $ 100 billion.
Is Facebook Worth $ 100 billion?
To put that $ 100 billion valuation of Facebook in perspective, the combined enterprise value* of Dell (DELL) and Cisco (CSCO) is ~$ 80 billion.
Combined current earnings of Dell and Cisco: ~$ 12 billion
So a 6.7x multiple of earnings.
Facebook's estimated earnings: ~$ 1 billion
A 100x multiple.
Clearly, Facebook's growth rate may ultimately cause that expected $ 100 billion to make sense but investors early next year will initially be paying a lot for promise.
I realize that comparing two mature tech companies to something as glossy, new, and full of potential like Facebook probably seems like apples to oranges. The type of investor who will buy a Facebook is no doubt very different from the one who'll buy some low multiple old tech company.
The same would be true for something like Microsoft (MSFT).
What's more difficult to explain is Apple (AAPL). Much like Facebook, that company is also growing extremely quickly, has tremendous economics (extremely high return on capital), $ 76 billion of cash, yet sells for just 11-12x** the $ 25 billion or so it will earn this year.
Why pay 100x for a fast growing leader in its space when another is selling for just 11-12x?
Adam
Related posts:
Is Facebook Worth $ 100 Billion?
Technology Stocks
* Enterprise Value = Market Capitalization - Net Cash.
** Apple's market capitalization is $ 356 billion. Subtract the $ 76 billion of cash and investments and you get an enterprise value of $ 280 billion. Enterprise Value/Earnings = $ 280 billion/$ 25 billion = 11.2x
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Applying Newton's Fourth Law
Origin of Newton's 4th Law?
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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Find good businesses; buy at nice discounts to value; stay within limits & stick to what's understandable (necessarily unique for each investor); minimize trading, frictional costs, & errors of all kinds.
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This site's emphasis? Put simply, it's on finding and buying -- with the long-term in mind -- good businesses at a plain discount to conservatively estimated value; it's on selling shares of those well-bought high quality business reluctantly. The view here is that selling makes sense only when core economics become permanently impaired, prospects have been misjudged, market price not just somewhat but, instead, meaningfully exceed per share intrinsic value, or opportunity costs are high. Buy/sell decisions aren't just an opportunity to increase returns; they're also an opportunity to make mistakes. It's easy to overemphasize the former and forget the latter. The focus here is on minimizing trading, frictional costs, and errors of all kinds; it's on staying comfortably within realistically assessed limits. First and foremost is the view that an investor should never make a specific investment based upon what someone else thinks. In other words, what makes sense to own is necessarily unique for each investor and it'd be unwise to not act accordingly. So, more generally, this site simply attempts to better understand some useful principles and ideas in context of investment. It's about, in a practical sense, what tends to work over the long haul as well as what, at times, gets the investor into trouble. It's not about grand theories in finance and economics. These too often distract from what matters or, worse yet, lead to costly misjudgments. As a result, they are mostly viewed with a healthy dose of skepticism here. Otherwise, the best thinking across disciplines should be learned well then put to good use in a way that's uniquely suitable.
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Notable Quote
"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger