patrick.net

thomas.wong1986 says

Apple grants a dinky amount. Jobs was not a generous person. You forget how much he saw money/wealth as evil.
2009 234,000
2010 34,000
2011 1,000
Hardly much to talk about see page 68

Dinky, heck no

That is ISO, Silicon Valley transitioned to RSU long time ago especially as companies flip from loss to income.

2008 = 7.8M @$111 = 865M
2009 = 6.2M @$214 = 1.3B
2010 = 6.7M @ $312 = 2.1B

Based on today's market value of $450 those 20.7M shares granted the last three years are worth 9.3B, there's plenty of new millionaires on the Apple pipeline as well. Of course, RSU's are not as lucrative as ISO's when the stock appreciated like it did.

It doesn't seem much compared to Facebook only because Facebook became a forty bagger while Apple was about 5 or six the last four years. Apple will never become a forty bagger anymore so stock option while lucrative will not get you rich. RSU's are guaranteed payout with appreciation upside.

What you think is dinky is mere transition of the Corporation's compensation structure. An estimated 100B are already excercised.

Facebook has a viable business model. Sure, it may eventually go the way of a dodo bird like Kodak, but it's stupid to argue that advertisers haven't benefited from Facebook. Advertising is a numbers game of getting people expose to the message, if enough people see it eventually you'll have an increase in your average business.

That is after all how barbie became popular in America. For the record, I have advertised on Facebook and Google. If you are reading this...join my peition.

www.facebook.com/1337cats

thomas.wong1986 says

Kevin says

Anyway, facebook isn't really being that overpriced when compared to other stupidly priced companies; they'll be at about 95 P / E, vs. Amazon at 130.

When we had a real tech boom in the 90s the returns were around 10-15% annually on the S&P with PE at 30. Anything over 50 was considered insane... and so is your 95 today.

The vast majority of IPOs were rationally priced and had to earn any increase in prices based on actually earnings not some pie in the sky story. High PE multiples cause a lot of problems and distractions for companies and employees we all rather not have.

95 *is* insane, just like the 90+ that you saw in 2000, and the 130 amazon is enjoying.

Just because it's priced stupidly doesn't mean that people who have the stock right now won't get rich off of it.

Kevin says

95 *is* insane, just like the 90+ that you saw in 2000, and the 130 amazon is enjoying.
Just because it's priced stupidly doesn't mean that people who have the stock right now won't get rich off of it.

You may have just lost your moral compass...

So your perfectly ok with investors lossing their shirt so a few FB employees and realtors benefit..And somehow FB employees will feel they earned it based on hype.

What happens when real tech companies, the bread and butter of Silicon Valley need to go the capital markets. If investors get burned badly with FB, they aint coming back here again. They lost confidence in "real" technology industries.

Warren Buffet understood all this.. thats why he called it "Wealth Transfer on massive scale"... and not wealth creation which is what we had decades before.

Advertisers look at what they get for their advertising. No longer will people simply toss money at an ad because someone says they'll make money. They want proof and the proof is in the numbers. With internet advertising you can see who is coming, who they're referring, what they're doing, how much time they're spending and if they're buying (or making you money in any way). Facebook is failing here, it's like groupon, people are realizing it's very hard to get those users to do anything once they've paid for them.

Not touching this with a 10-foot pole.

I *understand* that there are millions of adolescents of all ages, who want to attention whore their every movement.

However I just don't see it as productive nor trivially monetized.

Uh, I never claimed that it's "OK" for this stupidity to occur, only that it will.

People who are able to get in on the IPO are going to make out like bandits, fooling stupid pension funds into handing over their money.

That's just how these things go.

chanakya4773 says

FB can only do that by increasing its current monetization by 5 times on the same user base. can it do that ?

FB will have to hire a bunch of slimy and highly experienced 40-50 year old Madison Avenue ad guys.. there aint no 25 or 30 year old engineer who can answer that question...

But then how is it that Facebook has a 40% profit margin and billions in cash? They must be doing something right with advertising.

40% (gross) margins are actually fairly low in first-party advertising. Take a look at the filings from google, or even yahoo -- gross margins are much better there (upwards of 80%)

Facebook's net margin is lower than Google's, but better than Yahoo's.

What's the difference between gross margin and net margin for a web company?

Gross margin is income minus "cost of sales" whatever that is.

Net margin is income minus all expenses, right?

Web companies cost of sales usually includes "traffic acquisition costs". In the case of something like Google's adsense, this is the amount paid to publishers. It also can include things like revenue sharing arrangements.

For instance, there's a revenue sharing arrangement between microsoft and facebook on ads shown in search.

Facebook also only gets a 30% gross margin on facebook credits AFAIK.

I still don't quite get why there are two separate margins.

There's revenue, and there's expenses. So I would think there should just be revenue - expenses = margin

Gross Margin is typcially thought of as:

Revenue / Cost of Goods Sold or Cost of Revenue. It's the direct cost of attaining the revenue. Any business can generate revenue if they give it out for free or essentially free, but it only matters if the revenue has some profit or margin in it.

Revenue / total expense (revnue - COR - SG&A)is the operating margin. Include non-operating item like interest and extraordinany items and it is thought of as profit margin. Most people consider these SG&A (selling, general and Admin) expense or simply overhead. Overhead is mostly thought of as the fixed cost of doing business. Fixed doesn't mean fixed, when a company annouces layoff or hiring plan, It just a part of the company's plans to increase SG&A or reduce SG&A base on the needs of the business. Facebooks's SG&A expanded significanly betweem 2009-2011, which also means they have been hiring quikly in proportion.

Profit margin should be clarified to mean before tax or after tax. In 2011, Facebook achieved a profit margin before tax of about 40% and after tax profit margin of 25% Apparently they have not used some of Googles tax strategy's to get Effective tax rate to around 20%. Facebook is at 40% but we know it's going to be a shareholder demand to fix that soon. 40% profit margin before tax is among the top 1% in the S&P 500. The only company I can think of that has has higher profit margin is BIDU.

Having said that, this is GAAP accounting. An obvious flaw to GAAP profit is stock compensation expense for GAAP purpose vs. reality. Stock compensation expense recongized is based on mostly the black-scholes model and in the case of Facebook, the actual result per the model is nowhere close to reality. I believe it is hidden in the APIC.

Gross margin is important because it tells me the profit potential of the company. Let's say Facebook has a revenue of $100 and achieved gross margin of 80% and SG&A of 40%. (to get to 40% profit margin).

The comany has decided to expand SG&A by 10% to support their business. From $40 to $44

They had a great year and sold $200. (monetized their revenue but only need to expand SG&A by a little)

Gross Margin @ 80% = $160
SG&A 44
Profit Margin = 116 or 58%

Based on this oversimplistic model, doubling their revenue increased their profit margin from 40% to 58% or before tax profit from $40 to $116. A great gross margin leverages each additional dollar to the bottom line. To the extent that Facebook can monetize more revenue, it will be hit profits exponentially. That's what get the financial analyst people excited and support these crazy PE's. Google for the longest time was prices at 100 PE which was supported by fast growing sales flowing to the bottom line and actual cash even faster.

Which loops back to BIDU because it is a great example of the power of gross margins. BIDU had a PE of 500 when it first traded for around $10. Because they had excellent gross margin, that 500 PE ultimately became a ten bagger winner as well. The secret is they were able to monetize achived revenue into essentially all profits. Profit margin went from 25%, 35% 40% and now 50%! They can get to 60%. If you tell me that BIDU was going to be a 50% profit margin in 2008 (and kick Google's ass in China), I would pay 1000 PE easily.

To most, Facebook will appear expensive, but 100 PE can be a bargain if you can visualize this as a 75% growth business with 60% incremental profit margin. Facebook has that potential. Some of the largest private equity buyer who invest hundred of millions see it that way as well. It's 100B for a reason.

I still don't quite get why there are two separate margins.

There's revenue, and there's expenses. So I would think there should just be revenue - expenses = margin

The difference between gross and net margin is a reflection of a company's ability to contain costs. It's much more useful in manufacturing and other industries than it is in industries like software or advertising, where the only real expense is labor.

For many industries, you might as well think of "gross profit" as "revenue".

SFace says

Which loops back to BIDU because it is a great example of the power of gross margins. BIDU had a PE of 500 when it first traded for around $10. Because they had excellent gross margin, that 500 PE ultimately became a ten bagger winner as well. The secret is they were able to monetize achived revenue into essentially all profits. Profit margin went from 25%, 35% 40% and now 50%! They can get to 60%. If you tell me that BIDU was going to be a 50% profit margin in 2008 (and kick Google's ass in China), I would pay 1000 PE easily

You could equally have used Ariba, Commerce One, Agile, Priceline, VerticleNet or the other over-priced stock. They too had the same argument, but it all failed at the end.

If what you said was true, then why didnt we ever .. and I stress the work EVER see, prior IPOs going out at a higher valuation prior to 1995 and Netscape. Since 1995, pretty much nearly 99.99% of the IPOs have tanked. You mention, BIDU and Google.. yet there are countless others that failed badly.

When Cisco went public its valuation was modest and had to earn any stock appreciation based on performance. Its is a complete rip-off to over pay based on some pie in the sky forecast of higher future earnings. THAT WAS THE LESSON we learned from the DOT.COM bust.

thomas,

that person identifies HimSelf with the American Express Black card. You wanna spend your calories arguing with someone like that?

Jeez.

B.A.C.A.H. says

You wanna spend your calories arguing with someone like that?

Arguing burns calories? I need to argue more. It's the most fun exercise I get!

B.A.C.A.H. says

thomas,
that person identifies HimSelf with the American Express Black card. You wanna spend your calories arguing with someone like that?
Jeez.

they wont last long... they never do.

Based on Thomas' logic, Facebook would be massively overpriced when Microsoft valued them @ 15B on a private transaction three years ago. Clearly that is wrong.

High PE can be supported if the profit margin are high and sales are rising. That is the essense of a money generator and the only reason I see Facebook as a worthwhile investment. This has nothing to do with Ariba and Commerce One, or dot com. 99.9% fail rate is not tehnically not correct anyway.

Besides Goog and Bidu, there are plenty of companies that grow into their high PE's on IPO's post 2002 including NFLX, Salesforce, Chipotle, and Lululemon. Obviously, if your reference point is year 2000 and high PE then I get that excess.

The centurian is a tribute to my two mentors, one my boss and one my F-inlaw. That should not offend you. On the other hand, It totally respect your viewpoint as well. I only care about adding value to these message board based on my perspective.

I just read that 12% of facebook income comes from Zygna. That is impressive, they must have dumped a lot of money into facebook over the years.

SFace says

Based on Thomas' logic, Facebook would be massively overpriced when Microsoft valued them @ 15B on a private transaction three years ago. Clearly that is wrong.

That is why im saying FB is overvalued.. The logic was very sound on the part of MSFT.. you may not know what to do with something like FB, but you dont want the competition to get them either. So you inflate it beyond any possible way for FB to get acquired. Its a poison pill designed to backrupt the acquirer.

$300M for say 1.6% share in FB isnt much a material amount for Microsoft to actually lose. They sneeze more that each day.

Now that there is a exit, that investment for everyone else who pitched in has to have a big return.. but its already inflated thanks to MSFT.
And there will be blood...

SFace says

including NFLX, Salesforce, Chipotle, and Lululemon

They came out in dinky valuations.. Sales force went out at 15 and dropped to 11 before reaching 125+ many years later. Same with Netflix..
they were only a mail based DVD rental lighly valued before growint.. there was no way to spin/inflate this business..

The advantage facebook has right now is that it can find new ways of creating revenue. It's like google back in 2000. They came up with a model that made them boat loads of cash. However, over the years, they've figured out how to create reallly big boatloads of cash out of it.

Facebook right now is making money, but the potential there is massive. However, as it stands right now, advertisers are getting very little bang for the buck. The thing with Internet advertising is that you can get exact numbers. Newsprint you can claim for every person who brings in a coupon, 50 others forgot it at home. Who really knows? It's easy to fudge those numbers. Advertising online is far different. It's possible to see exact impacts to your numbers, visitors, how much traction you get, how often they return, etc. Facebook is doing a horrible job in all of those metrics.