Comments on: How the tech-stock valuation curve inverted

By: TFF

TFF — Mon, 30 Jul 2012 10:32:47 +0000

“still looks pretty well valued to me”

Perhaps he meant “pretty richly valued”? Is how I read it, at least.

By: reality-again

reality-again — Mon, 30 Jul 2012 01:40:47 +0000

“…Facebook, which, with its $65 billion market cap, still looks pretty well valued to me.” -
A sentence that speaks more about the lasting power of repeated hype than about the value of facebook.
After its recent free fall, this company’s stock is still overvalued by a factor of one order of magnitude, and there is still absolutely nothing that can remotely justify such value in the real world.
It’s a multi layered bubble: When the external layer bursts, there’s enough hype left to support another layer…
Does the name ‘Netscape’ ring a bell here? Many people once thought it would rule the Internet, because it had such a great browser. Sounds funny, isn’t it?
Others thought that Yahoo would be the biggest winner of all, because it was such a great Internet ‘Portal’ – as if people needed a door to enter and navigate the web…
AOL went through a similar hype cycle, etc.
When Silicone valley and Wall Street decide to produce a new fad and put their hype machine to promote, nothing can stop them. Everybody get their mind obscured, and their senses blurred, and eventually, they lose contact with reality.
But reality is there, all the time.
I wonder why facebook doesn’t buy back its devalued stock… Do they know something others don’t?

By: skyman123

skyman123 — Sun, 29 Jul 2012 22:31:53 +0000

Felix I think the issue if fairly straightforward here. On the private markets, data is opaque, as there are no regulatory requirements to release anything. A company like Facebook, which has millions of users and touches nearly everyone is a great story. What’s not a great story are the fundamentals: where the profit is coming from. On the secondary market, you can bid this company up on hype. Once you go public and the hype dies down, you’re left with the numbers.

And let’s be clear, Facebook’s numbers are terrible, it’s CEO tosses word salad in the air on calls, and a lot of people got royally screwed for believing the hype so that’s dragging down an entire sector. But the main problem remains…how do any of these companies actually outperform? How do they make money that justifies the high multiples? When was the last time you clicked on a Twitter or Facebook ad? Do you reveal your Facebook profile publicly? Do you even really pay attention to Twitter (I, frankly, don’t know many people who do)? How about LinkedIn? Do you realize they monetize their back-end by allowing headhunters and other professionals to search it so they don’t have such a reliance on ad revenue? So it’s pretty clear to me what’s happening. Unless Facebook can grow revenue in line with it’s user base, it’s a bad investment. Not to mention the insane structure of its stock tiers. Don’t even get me going on the uselessness of Twitter…

By: ottorock

ottorock — Sun, 29 Jul 2012 20:39:15 +0000

Today the line between private and public listed stocks is blurred, with Facebook’s presence on Second Market a good example. The IPO of FB on Nasdaq certainly did not mark the day when shares in that company were first freely traded.

By: Curmudgeon

Curmudgeon — Sun, 29 Jul 2012 20:11:28 +0000

I’m not sure what your overall point is here, Felix, but I’ll offer a couple of observations:

>>If you’re in the public markets, your performance has been mediocre for over a decade . . .

If you’ve achieved mediocre performance since around 2000, you’re doing much better than the market at large.

And unlike circa 2000, the focus today seems to be primarily on social media. The revenue model for social media is advertising, and it’s not yet clear that it has the heft to take advertising to the next level (LinkedIn has a couple of other revenue models that may be setting it apart right now).

But the fact is that web properties by and large continue to be brain dead on making money. Unlike 2000, that seems to be important now. Advertising may work for some, but it’s not a universal business model. That may be holding down any tech bubble in the public markets.

By: TFF

TFF — Sun, 29 Jul 2012 19:58:35 +0000

“psychology and momentum of the entire technology sector”

What about “valuation”? The tech sector is facing some real challenges right now, which is holding valuations down.

If you can successfully identify which companies will NOT see their markets evaporate in the next five years, you can make some nice profits. But you’ll need to get it right at least three times as often as you get it wrong.

By: TFF

TFF — Sun, 29 Jul 2012 19:31:36 +0000

Felix, what percentage of private equity deals actually pay off? Perhaps one in ten? If those few *didn’t* generate tenfold returns, they would be losing money overall.

In theory, the private equity investors ought to end up with very nice percentage gains on average. They take a lot of risk — risk which can’t wholly be averaged out by participating in a multitude of deals — and typically need to wait many years before cashing out. Investments that are risky and illiquid SHOULD promise high returns, or nobody with any sense would buy into them.

The problem is that (as you say), private equity has been flooded by investors buying into this concept without actually testing the numbers. So the private equity valuations may be unrealistic at this point.