According to news reports facebook will be filing an application with SEC for an IPO early next year which might value the company around $100 billion dollars. Before this number came out, I was anxiously waiting for a facebook IPO. I also tried to buy facebook shares through a secondary market but transactions costs and volumes required to buy in such markets are prohibitively high, preventing people like me from trading in such markets.
That being said, the real issue I have now is facebook's valuation of $100B. Before we determine valuation of facebook, lets look at the current value of other technology giants, their growth opportunities and risks.
I am going to use Market capitalization for these companies at current share price as approximate firm's value. Enterprise value in each case is little less. Firm's value if calculated in each case should come around its Market Cap with the exception of Amazon in my opinion which I believe is valued much higher by the market.
To start with, let's look at Apple. It's the second most valuable company in the world and is valued at $346B at the time of this writing. Market for whatever reason is not anticipating high growth in Apple, which is reflected in its little over 13 P/E ratio. But in my personal opinion, Apple still has a bright future and it is going to grow in foreseeable future at the same rate as it has done in the last decade. I don't need to go into details about Apple's stream of revenue but we know that it offers a diverse set of products and continues to create new markets (for example from IPod to IPhone to IPads. Now prediction is they will revolutionize TV industry). Given my level of expertise, I cannot predict where Apple would be in next ten years but in my humble opinion market is undervaluing Apple at $346B. The biggest risk in investing in Apple at this point is the fact that Steve job's is gone and company needs to prove that it can be just as successful without its visionary founder.
Another similar tech giant is Google. Google is currently valued at $188B. Based on its P/E ratio of 19, we can say that market is expecting Google to grow faster than Apple. Given the diversity of its Products and Services, Google is in a solid position and in my personal opinion its market valuation, reasonably reflects its fair market value. Again Google's revenue stream mainly consists of online advertising revenue, but Google has successfully diversified revenue sources by acquiring youtube, double click and by launching a successful Smartphone operating system Android.
Third tech giant that I would consider is Amazon. Amazon is currently valued at $85.7B while trading at a P/E ratio of over 99. That is huge. Market apparently is expecting a lot of growth in Amazon. In my personal opinion nothing can justify a P/E ratio of 99 unless a company had a particular quarter where it took a huge one time charge, for either acquisition or for any other reason. This however is not true for amazon. In fact, before this quarter's results, Amazon was trading at a P/E ratio of over 120 which in my opinion, in no way, justifies the underlying value of the company. If reader's followed Netflix, they should know by experience, what happens to their investment in companies that are valued so ridiculously high. As for Amazon's revenue stream, we know that its the largest online retailer. Amazon also owns Zappos. Besides it's Kindle book reader, Amazon has recently also entered the tablet market with its new Kindle fire. As Amazon itself calls a technology company rather than a retail company, Amazon has also entered into cloud computing space to increase and diversify its source of revenue stream.
After discussing these three giants, let's look at facebook. Majority of its revenue at this point comes from online ads and some from virtual currency sold on facebook. As for risk to facebook's business, I think people have adapted to facebook and there is a network effect which will make it very difficult for any competitor to come in and beat facebook in social networking. Google has tried it multiple times with Google Plus being its latest attempt, but so far it has failed. I have already written about it and in my opinion Google plus will fail until some privacy policies are drastically changed. That being said, if there is another revolutionary idea that will change how people use internet (it has happened before with facebook being one such revolution), then facebook in its current state stands to lose most. This risk factor and the fact that its revenue stream is not as diversified as other technology giants I discussed above, I think facebook's valuation at $100B is too high, specially when compared to valuation of other tech giants. Unless you are a speculator who is trying to make a stag profit, I think you should stay away from buying facebook at such a high value.
That being said, the real issue I have now is facebook's valuation of $100B. Before we determine valuation of facebook, lets look at the current value of other technology giants, their growth opportunities and risks.
I am going to use Market capitalization for these companies at current share price as approximate firm's value. Enterprise value in each case is little less. Firm's value if calculated in each case should come around its Market Cap with the exception of Amazon in my opinion which I believe is valued much higher by the market.
To start with, let's look at Apple. It's the second most valuable company in the world and is valued at $346B at the time of this writing. Market for whatever reason is not anticipating high growth in Apple, which is reflected in its little over 13 P/E ratio. But in my personal opinion, Apple still has a bright future and it is going to grow in foreseeable future at the same rate as it has done in the last decade. I don't need to go into details about Apple's stream of revenue but we know that it offers a diverse set of products and continues to create new markets (for example from IPod to IPhone to IPads. Now prediction is they will revolutionize TV industry). Given my level of expertise, I cannot predict where Apple would be in next ten years but in my humble opinion market is undervaluing Apple at $346B. The biggest risk in investing in Apple at this point is the fact that Steve job's is gone and company needs to prove that it can be just as successful without its visionary founder.
Another similar tech giant is Google. Google is currently valued at $188B. Based on its P/E ratio of 19, we can say that market is expecting Google to grow faster than Apple. Given the diversity of its Products and Services, Google is in a solid position and in my personal opinion its market valuation, reasonably reflects its fair market value. Again Google's revenue stream mainly consists of online advertising revenue, but Google has successfully diversified revenue sources by acquiring youtube, double click and by launching a successful Smartphone operating system Android.
Third tech giant that I would consider is Amazon. Amazon is currently valued at $85.7B while trading at a P/E ratio of over 99. That is huge. Market apparently is expecting a lot of growth in Amazon. In my personal opinion nothing can justify a P/E ratio of 99 unless a company had a particular quarter where it took a huge one time charge, for either acquisition or for any other reason. This however is not true for amazon. In fact, before this quarter's results, Amazon was trading at a P/E ratio of over 120 which in my opinion, in no way, justifies the underlying value of the company. If reader's followed Netflix, they should know by experience, what happens to their investment in companies that are valued so ridiculously high. As for Amazon's revenue stream, we know that its the largest online retailer. Amazon also owns Zappos. Besides it's Kindle book reader, Amazon has recently also entered the tablet market with its new Kindle fire. As Amazon itself calls a technology company rather than a retail company, Amazon has also entered into cloud computing space to increase and diversify its source of revenue stream.
After discussing these three giants, let's look at facebook. Majority of its revenue at this point comes from online ads and some from virtual currency sold on facebook. As for risk to facebook's business, I think people have adapted to facebook and there is a network effect which will make it very difficult for any competitor to come in and beat facebook in social networking. Google has tried it multiple times with Google Plus being its latest attempt, but so far it has failed. I have already written about it and in my opinion Google plus will fail until some privacy policies are drastically changed. That being said, if there is another revolutionary idea that will change how people use internet (it has happened before with facebook being one such revolution), then facebook in its current state stands to lose most. This risk factor and the fact that its revenue stream is not as diversified as other technology giants I discussed above, I think facebook's valuation at $100B is too high, specially when compared to valuation of other tech giants. Unless you are a speculator who is trying to make a stag profit, I think you should stay away from buying facebook at such a high value.
