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Guest wellmont

Primarily because:

 

[*]It is a good product that people like using, the interface is clean, smooth, and functional.

[*]The content on there is interesting - staying in contact with your friends, stalking photos of gir....

[*]It is useful, and a substantial upgrade in doing things, useful for everyday life, useful for advertising, etc.

[*]There are strong network effects, one cannot simply start up a rival social network and expect it to work.

[*]More subtly, it is a platform rather than a product, if a new, interesting product emerges, they can absorb it by plugging into the platform.

[*]It is addictive. :)

 

 

how do you think about valuation? thanks.

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Guest valueInv

Primarily because:

 

[*]It is a good product that people like using, the interface is clean, smooth, and functional.

[*]The content on there is interesting - staying in contact with your friends, stalking photos of gir....

[*]It is useful, and a substantial upgrade in doing things, useful for everyday life, useful for advertising, etc.

[*]There are strong network effects, one cannot simply start up a rival social network and expect it to work.

[*]More subtly, it is a platform rather than a product, if a new, interesting product emerges, they can absorb it by plugging into the platform.

[*]It is addictive. :)

 

 

how do you think about valuation? thanks.

 

If you answer that question you get an F from Buffet :D

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Primarily because:

 

[*]It is a good product that people like using, the interface is clean, smooth, and functional.

[*]The content on there is interesting - staying in contact with your friends, stalking photos of gir....

[*]It is useful, and a substantial upgrade in doing things, useful for everyday life, useful for advertising, etc.

[*]There are strong network effects, one cannot simply start up a rival social network and expect it to work.

[*]More subtly, it is a platform rather than a product, if a new, interesting product emerges, they can absorb it by plugging into the platform.

[*]It is addictive. :)

 

 

I'm not convinced.  I remember MySpace being the panacea, that was the *new* thing and it was huge, before that was Friendster.

 

MySpace proved that you don't need a great interface to get users, that site was ugly, and it let users make it uglier, and they did!

 

Facebook has two things going for it:

1) The network effect

2) The platform

 

The Facebook platform is mostly dead, I'd HIGHLY suggest you read this: http://pandodaily.com/2013/07/23/move-fast-break-things-the-sad-story-of-platform-facebooks-gigantic-missed-opportunity/

 

The last thing developers want is an API that's in constant flux, and the last thing a business wants that's attached to Facebook is a company that's constantly shifting direction and going back on their word.

 

The network effect appears to be strong still going off numbers.  Personally Facebook was interesting when I joined in 2007, there was a novelty to finding high school friends and seeing what they were doing at the time.  The novelty wore off, and suddenly I was reading status updates from people who apparently had no filters on what they said and shared deep/odd thoughts with the world.

 

I also started seeing a TON of kid pictures.  Now I have my own kids, and I believe my wife posts a lot of pictures of them, but that's a wife/grandma thing, relatives eat those up.  The kids I care about are friends kids that I see in person.  I'm not that interested in seeing pictures of kids who's parents I haven't seen for 15 years.  A family picture is nice to see they're doing well, but daily updates with pictures is too much.

 

In short I just stopped using the site, I go on maybe once every few months to look at some pictures a cousin posted.  I've noticed something, that most of the guys I was friends with stopped posting as well, it's mainly become a women/kids site.  A lot of people I knew on there quit altogether.

 

Maybe Facebook is a stage of life thing, I can see teenagers and college age students enjoying it, but as one ages it becomes less relevant unless they're a mother or grandmother.

 

As someone who's been on the internet WAY too long starting with Gopher and then Mosaic, I can say that these mega sites come and go.  Back in the 1990s it was unfathomable to think that AOL would be an after thought, or Altavista, or Lycos, or....

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Guest valueInv

If you answer that question you get an F from Buffet :D

 

A more constructive way to answer, if you feel this way, is to say what you think is wrong with the answer, or perhaps give your own answer, since you own the stock.

 

I would be have to give a constructive answer if people are willing to have a constructive conversation. Comparing Facebook to MySpace because they are social networks is like comparing Berkshire to Bear Stearns because they're both financials.

 

BTW, my comment is in response to a similar comment by Wellmont.

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- I don't think about valuation, my point was about "why facebook is here to stay".

 

- Have any of you ever used myspace? Friendster? I mean actually used it day to day? People keep bringing up Myspace, but I see little or no connection between the two. Full disclosure, I'm not old enough to remember Friendster. I started using FB when I went to college in 05. I have used Orkut and Xanga, but those got eaten by FB. Furthermore, Facebook is not a "new" thing anymore, it's nearing 10 years of existence and has a huge, global user base.

 

- That article about Facebook Platform doesn't relate to my point. When I say Facebook is a "platform", I don't mean it in the sense of a software platform for developers. I mean as a multifunctional, generalized medium that can absorb a more specific, niche product or application. Think of how iPad is a general purpose tablet that can be used for a range of different tasks whereas Nook is not.

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Used myspace and facebook...the main features of the platform are the same. You have your personal page, where you upload photos/videos/etc. and where people post. Facebook certainly improved upon it with a cleaner interface and additional features (poking, apps, etc.).

 

Remember, what initially drew people to facebook was the exclusivity. Only college kids could access it. It's not like the platform you see today is what made it widespread.

 

In fact, I fear they will eventually spread themselves too thin, eventually the "kids" stop using it, management kills the purity of it by "maximizing revenue", and it fades. I don't see where it will be in 10 years. I have no idea how to value it even today, or within a five-year time frame. Maybe it's a good trade, if you think earnings will grow in the next year or two. I'm not sure I define that as a sound investment, though. Definitely not within a value-investing framework in my opinion.

 

That does not mean it won't make you money!

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I think it's here to stay. Myspace and FB are apples and oranges. Then again, it's hard for me to remember what the internet was like before Facebook. :)

 

ruppert murdoch bet hundreds of millions of $$ that myspace was "here to stay". Unfortunately he got involved in a business that changes rapidly and is impossible to predict more than 24mo out.

 

Interesting article on myspace.

 

http://www.lonelyvalue.com/2011/06/myspace-cautionary-tale.html

 

"The dirty little not-so secret is that MySpace was never much of a business.  Just because lots of people use something online doesn't mean there are profits to be had.  Hello, Pandora (P)!

 

But few things are as powerful as the fear of being left behind.  And this includes media executives.  I remember those bygone days when you did not exist if you were not ON MySpace.  Sound familiar?

 

Yes, I'm going to mention the F-word... Facebook."

 

 

 

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Facebook differs from Myspace in an important way:

 

Facebook makes a lot of money.  Its accounting is a little weird as it hides Facebook's profits, but it has some serious cash flow.  Both Facebook and Google sells advertising that works.

 

Not every Web 2.0 company out there is pure hype.  Some of them have actual cash flow.....

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Guest wellmont

 

Interesting article on myspace.

 

http://www.lonelyvalue.com/2011/06/myspace-cautionary-tale.html

 

"The dirty little not-so secret is that MySpace was never much of a business.  Just because lots of people use something online doesn't mean there are profits to be had.  Hello, Pandora (P)!

 

But few things are as powerful as the fear of being left behind.  And this includes media executives.  I remember those bygone days when you did not exist if you were not ON MySpace.  Sound familiar?

 

Yes, I'm going to mention the F-word... Facebook."

 

a money making business can lose it's audience or it's customers as quickly and as a surely as a business that doesn't make money or never made money. aol made a lot of money in it's day. murdoch believed tying MS to his properties would make it profitable. So the point, in my view, really isn't that FB makes money; and MS never did. the trick is what's going to happen down the road? I maintain the answer to that is still "up in the air".

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I think that you can value Facebook relative to Google.

 

1- Facebook and Google have some overlap in customers.  Many of Facebook's advertisers probably also advertise on Google.  I'm seen the same ad retargeting stuff on both Facebook and Google.

*There are still some differences in their customers.

**Facebook is more like Google's Adsense than Adwords.  Most of Google's revenue derives from Adwords.  Adsense has more upside from new advances in monetization like ad retargeting.

 

2- Google is more likely to be around in 10/20 years, in my opinion.

 

For this reason, Google deserves a higher multiple.  I'm not into pair trading but it could be reasonable to short Facebook and go long Google.

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I think the question you have to answer (if you want to invest in facebook) is, "what is the intrinsic value of facebook?" Haven't really seen anyone put a number on that...

 

Well, you can't put a number on it.  You could put a very wide range on it though with a wide probability distribution. 

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I think the question you have to answer (if you want to invest in facebook) is, "what is the intrinsic value of facebook?" Haven't really seen anyone put a number on that...

 

Well, you can't put a number on it.  You could put a very wide range on it though with a wide probability distribution.

 

I disagree that you can't put a number on it.  Every single person puts a number on it or makes the decision to ignore it (the too hard pile).  The market definitely puts a collective number on it. 

 

As for attempting to determine intrinsic value, here are my thoughts.  I would determine it the same way as a newspaper, TV station, or any other advertising method.  FB has 1 billion users, and that is approximately 2 billion eyeballs.  Advertisers sell based on readership and viewers.  Make some assumptions adjust for cost structure and you can determine an approximation.  I would add that the unique feature of FB is that its users create all the content so they are unique (GOOG is similar, although they pay for content).

 

Once the approximation is made I would discount it for a few reasons, but the most important question is the probability that FB will be around in 10 years.  Apply that probability, buy at a discount and rinse and repeat.  That is value investing. 

 

Where most value investors will break down on FB is on that last step, the probability of the company will be around in 10 years.  Their confidence will like be very low and thus assign a low probability, or simply avoid it all together.  The greater the confidence the more solid the investment.  I would love to apply a high probability because FB has huge potential.  No other media company can offer customized advertising to a viewership of over a billion people.  That fact keeps me an interested follower of the company. 

 

With that said, why are pages after pages and post after post on this forum about tech companies?  I believe the answer is two fold.  First, some investors "believe" they have special knowledge and thus can assign a high confidence probability to the success of tech companies.  Secondly, the spirited debates are a result of a wide probability range and thus making the determination of IV very difficult.  The key takeaway for me is when debates become too long it's likely time to pass on that investment and look for something easier to value.  FB included, IMO.

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I think the question you have to answer (if you want to invest in facebook) is, "what is the intrinsic value of facebook?" Haven't really seen anyone put a number on that...

 

Well, you can't put a number on it.  You could put a very wide range on it though with a wide probability distribution.

 

I disagree that you can't put a number on it.  Every single person puts a number on it or makes the decision to ignore it (the too hard pile).  The market definitely puts a collective number on it. 

 

...

Secondly, the spirited debates are a result of a wide probability range and thus making the determination of IV very difficult.  The key takeaway for me is when debates become too long it's likely time to pass on that investment and look for something easier to value.  FB included, IMO.

 

Well first you say you think you can put a number on it, then you say there's a wide probability range.  I think the two are mutually exclusive.  We can argue semantics, but some argue there's a single number with a 'likeliness that number is correct' attached to it (or a 'risk rating').  Others say there are a range of numbers each with some probability.  The fact that you can change your discount rate and get massively different numbers means there isn't a 'real number' for any intrinsic value number.  All of this is an inexact process, since by definition there are too many variables.  That's why value desires a margin of safety, since your number could be wrong.  But I agree with your second point..  There are too many unknowables in a stock like FB.  It's not a stock that can be easily valued.

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I think that you can value Facebook relative to Google.

 

1- Facebook and Google have some overlap in customers.  Many of Facebook's advertisers probably also advertise on Google.  I'm seen the same ad retargeting stuff on both Facebook and Google.

*There are still some differences in their customers.

**Facebook is more like Google's Adsense than Adwords.  Most of Google's revenue derives from Adwords.  Adsense has more upside from new advances in monetization like ad retargeting.

 

2- Google is more likely to be around in 10/20 years, in my opinion.

 

For this reason, Google deserves a higher multiple.  I'm not into pair trading but it could be reasonable to short Facebook and go long Google.

 

Hmmm, this seems dangerous to me for reasons other than short term price fluctuations. A multiple is an implied DCF divided by earnings meaning that the growth rate of the earnings is going to have an enormous impact on the correct multiple for a company (along with discount rate and time the company is in operation). Pair trading based primarily upon only one of the variables seems like a big no-no in this situation! Both companies are very high growth which only exacerbates the problem.

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