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What is Facebook really worth?
As many of our readers are probably aware, Facebook (FB)
is about to come to market in the coming days; this will probably be the
largest IPO (Initial Public Offering) of a stock ever. The IPO is estimated
to raise approximately $10-$11 billion, valuing the company at between $77
and $96 billion at launch. It may even get to over a $100 billion. To put
this into context, if the upper end of this range is achieved, FB will be
half the size of Google and would rival the market value of Amazon.com and
Cisco Systems Inc.
In the case of FB, the big question on
everyone’s lips is, will this hyped-up investment be worth it? In a
nutshell, my take would be that it is one thing to “like” FB, but it is
quite another to part with one’s cash to invest given the large number of
question marks over its revenue model.
Last week, FB were honest enough to
warn potential investors that the long term financial outlook of the company
could be threatened because there were too many people accessing FB via
mobiles or tablets and they had little or no idea at the moment of how to
monetize this. In fact, this led FB to alter its filing at the Securities
and Exchange Commission to say that if this continued, “Our financial
performance and ability to grow revenue would be negatively affected.”
In fairness to FB, they are trying to
solve the problem and have, according to the UK Telegraph, launched “its own
app store”. However, experts are saying that the change in the IPO is
tantamount to a profits warning.
The other major problem that potential
investors have is the dual class shareholding structure. This basically lets
a 28 year old, Mark Zuckerberg, run the company as if it was still his own
private company.
As stated above, FB is hoping to raise
nearly $11 billion at the IPO Thursday and expects the share price to be
around the $33 mark give or take a couple of dollars. However, also as
stated previously, this may get higher as some analysts are forecasting FB
may increase that prediction as investors have indicated they want to
purchase more shares than the 337 million FB is launching with later this
week. This is why the value of FB could well be more than $100 by the end of
the week.
The FT wrote a very insightful piece on
the company and brought up some of the following interesting points:
- Is FB going to be ubiquitous on the
internet? I.e. will it attain the same position on the internet that
Microsoft once held in personal computing?
- FB needs to own the social dimension
and make it pay.
- Can FB control the digital
advertising space, like Google does today?
- In Google, users ask for information
on products, so targeted advertising works. Will FB users be happy to be
targeted for what they profess to like?
- Running a social network is
expensive, with capital expenditures running at 30% and growing.
- Free cash flow returns on assets are
strong, but Google’s are twice as high.
On traditional accounting measures, the
company does not appear to be listing on the cheap, with a PE of 99 being
mooted as a valuation metric. If one looks at Price to Sales numbers, it is
estimated to trade on 13-16 Sales, compared with the likes of Google on 5-6.
The problem with companies like FB that have explosive growth rates is how
does one value these companies? Google was also apparently expensive when it
listed, but this did not stop the share price growing by 600% since launch.
On the plus side, with 900 million
active users, Facebook is undoubtedly the market leader in social
networking. But size alone in the technology space does not always mean
success. FB might be large today, but what happens when it is no longer cool
to have your mum (or dad, or employer) checking out your profile, not to
mention the loss of privacy as advertisers start to target your shopping
habits.
The company would argue it does not
need to be cool, for once it reaches a certain size it will be
irreplaceable, similar to what Google is now to search engines. Should the
dream of a monopoly over social networks be achieved, then one could imagine
a future where searching for information, reading news, watching television,
writing a document or talking on the telephone are activities conducted in
the Facebook world. In this scenario, a $100 billion price tag may not be
that ludicrous. Facebook money anyone?
Dreams of a controlling the social
networking world aside, what does one have to believe today to justify the
current valuation?
The FT has done this analysis and has
calculated that the business has to become far less capital intensive
(inclusive of acquisitions) over time, as Google and Microsoft have done.
This can be done but for margins to also stay near today’s level of about 50
percent it would be a big ask indeed. Sales would have to grow at least six
fold in this period. The latter is certainly possible. For comparison, when
Google had the same revenues as Facebook has now it took just seven years
for them to increase another 10 times.
Bottom line, investors will need to
take a leap of faith if they are to buy into the Facebook dream. This could
indeed be the next Google or Apple, but it could also very well be the next
Groupon, down 50% since launch. Caveat emptor!
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The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Stephen Tierney on stephen@mbmg-international.com |
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China in your hands, part 1
Recently, my business partner, Paul Gambles who is a
regular on CNBC, appeared on the Money Channel and gave his views on China:
We used to talk about the $64,000
question, but I think the current and future state of the Chinese economy is
the 64 billion RMB question. Everyone has a theory about this, but the real
answer is that nobody really knows.
There's a real problem in looking at
the Chinese economy in that the data is very difficult to trust. We don't
know how reliable the data is. Now, to some extent that's true of all
economic data around the world. We don't believe the data the American or
the British or the European governments produce. But it's even more so in
China, partly because the government have such strong control over the data,
but also because the government have such strong control over the economy as
well.
In a free market, we have a good idea
of what's actually going on underneath the surface of the economy. In a
market like China, where the economy is very controlled, it's very difficult
to know that normal market processes have been followed. When banks lend
money in the States it's really determined by, or should be determined by,
commercial factors and assessing the risk and return. Admittedly, that went
a little bit crazy in America over the last fifteen or twenty years when
financial engineering changed some of those methods, but as a general
principle, what should happen in a free market is that capital will chase a
return. In a controlled market like China, the government can define
precisely where they want capital to go to.
America, for the past few years, has
been trying to create jobs and get the unemployed back to work. In China, if
they have unemployed, they could get them back to work tomorrow; they could
define exactly how many jobs to create. They have the ability to do that.
They have some very sophisticated people. The People's Bank of China, the
central bank, has over 2000 registered economists sitting there every day
figuring out which levers to pull, which buttons to press, which adjustments
to make in order to make the Chinese economy function. From that point of
view, it's a very efficient machine in that they can make it do exactly what
they want it to do.
The real problem with that is that it
doesn't have any kind of market control. In a free market, if you do
something stupid, if you make a bad investment, then generally the market
will catch you out; it will tell you it's a bad investment; it will price it
as a bad investment and you will lose money because of it. In China, they
don't really have that correction mechanism, so our biggest worry about
China is that nobody really knows what's underneath, and what's actually
underneath might not be what everybody expects to be there because it has
because it's been so manipulated by the government and external forces.
It's been so controlled that actually
the problems can be much worse than many of us realize. We won't know until
we get there, but because the markets haven't been able to make their normal
corrections and their normal adjustments during this last twenty years of
Chinese growth, there is actually a very high risk that when we get there,
the correction could be far worse than most people are talking about right
now.
Everyone raves about the 8.9% GDP, but
because we don't really know all the nuts and bolts that make the Chinese
economy work, we don't know where that 8.9% comes from. 8.9% as a headline
number actually sounds quite good, but if that's something that's been
manipulated by extra stimulus and debt being forced into the system, then we
don't really know the quality of that growth. If it's 8.9% of what we would
call normal GDP, self-sustaining GDP that grows organically out of the
economy and it's real and it's not interfered with, then in that case we
would be very happy with that, but in China we don't really think that's the
case.
In China, the market doesn't have any
adjustment mechanism or the ability to push back, so a lot of this 8.9%
could be what we would regard as being phony growth, not real growth. That's
really the question for China - it's a matter of how real and sustainable is
all this growth or how much of it has been manipulated?
For something like 20 years, there were
two charts that went up by around 10% per year. One was the Chinese economy,
and the other was Bernard Madoff's investments, and we all know that Bernie
Madoff's investments weren't real.
Our worry is just how real those
Chinese returns are and how much of China's growth has been induced by
artificial government control and external influences. The problem with that
is that if there have been externalities, that will have led to a whole
bunch of problems in the system. If loans have been forced into sectors
where banks really shouldn't have been lending, then we're going to end up
with an enormous amount of bad debt.
To be continued…
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The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Stephen Tierney on stephen@mbmg-international.com |
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Don’t panic … yet!
Quantitative Easing has artificially and unsustainably
inflated asset prices, as my business partner, Paul Gambles, recently told
Money Channel's MJ Banphot.
A lot of people are getting confused by
economic news that is maybe not particularly promising, and yet they keep
seeing all these risk-asset prices getting higher and higher since they
bottomed out at the low point in December. Since then, we have seen a really
strong rebound in risk-asset prices. You have to look at this in terms of a
longer-term picture. If you look all the way back to 2008, when we had the
Global Financial Crisis, since the period following the recession, the
so-called great recession, we have not really seen any kind of economic
activity recover the way we normally would after previous recessions.
Unemployment is still a real problem
out there. I know in the States they are now saying it has come down from 9%
to 8.5%, but it's reducing very slowly. If you look at the aftermath of
previous recessions, unemployment has always recovered much more quickly
than it is recovering this time. Now, there are a lot of people who would
challenge those figures and say that the 8.5% figure is misleading and
unrealistic because there are different ways of calculating unemployment; if
you have been unemployed for a year in the States then they do not count you
any more; if you are no longer looking for work, they do not count you. As I
have said in the past, lies, damned lies and statistics.
Perhaps an even more important metric
is that average wages in the US are still falling quite dramatically as
well. Even if the above figures are true and actually have gone from 9% to
8.5% unemployed, the total quantum of what people earn actually is not
getting any larger; consumer earnings are not getting any bigger either
because salaries per person are actually getting lower. There is a real
problem there in that if unemployment is getting better, it is only
improving very slowly. Also, it is not really following through into the
total amount of consumer earnings and, therefore, the amount of money
consumers have to spend because wages are falling.
There are also other measures; if you
look at GDP, American GDP for 2011 was only 2.8%. We have had something like
twelve quarters now of positive GDP since the official end of the recession,
but it has been very slow GDP growth.
Again, following a period of recession
when economic activity is muted and people stop spending, you would normally
have a catch up effect because neither people nor businesses were spending
and so that really sends GDP increasing quite sharply. We have not seen that
either, so we have this disconnect where real economic activity is very
slow, very muted, and people can see that in the streets.
If you go to America, you get the sense
of unemployment and of people worrying about their jobs, and of businesses
that are really struggling to operate and to borrow money, and yet asset
prices, on the other hand, have gone up really sharply since the end of the
recession in 2008, probably much sharper than would normally happen
following a recession or a depression.
A lot of people would say that the
current asset prices are a sign of optimism, but the real problem is the
disconnect between the price of assets, and the answer to that is something
that we have been talking about for quite some time, and that is that
risk-asset prices are really being driven by liquidity. When new capital
comes into the markets, capital automatically finds its way to the best
opportunities. It will go wherever the highest return is. If you have got
capital yourself, you will go and place it where you think you can get the
best return. All capital basically behaves in that way.
What we were concerned about in the
third quarter of last year was that liquidity really seemed to be drying up.
This happened, despite all the efforts of the Central Banks, despite
Quantitative Easing and all the other things that bankers have done to try
and force more money into a system that was not generating extra money
through its own economic activity. Despite all that, we saw a couple of
really alarming indicators in Quarter three of 2011.
We were watching the TED Spread and the
LOIS, everyday. The TED spread is basically the difference between the
interest rate that gets paid on the Treasury-Bill and the interest that gets
paid on the EuroDollar, which is basically the cost of borrowing Dollars
outside of the United States, and that gap was getting wider and wider all
the time. Once that spread gets wider than about 50 points, that is usually
a flashing red light and a sign that we might be heading into some kind of
liquidity crisis.
The flashing red light went back to
amber following the intervention of global central banks, most evidently
manifested in the ECB's LTRO #1 and #2 programmes which have pumped one
trillion Euros into Europe's weakest banks and economies - but it is a small
step from there back to the danger zone. Be afraid, be very afraid... and be
opportunistic too - there is a real opportunity to profit from expected
dislocations - non-US investors should take a holding of Greenbacks to
profit from any short term USD strength.
Above all, stay liquid. If you know
where to look then there are still good gains to be had but do not get tied
up into anything which will inflict severe penalties if you want a quick
exit. Remember, if it sounds too good to be true then it usually is.
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The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Stephen Tierney on stephen@mbmg-international.com |
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Why is everything cyclical?
My business partner, Paul Gambles, was asked recently
about the long-term seasons cycle.
“Trying to understand what the global
economy has in store is something that can be very difficult for all of us.
The global economy has always been a very complex animal, and although
there's a lot of research and a lot of data available today, I'm not sure
that most people understand it any better now than they did hundreds of
years ago. There was a piece of research we came across recently that showed
of 36,000 registered economists in the world, only twenty of those people
actually managed to predict the biggest single global economic event of our
lifetimes, which was the financial crisis of 2008. All the others simply
didn't see it coming.”
At MBMG we have been doing some
research as to why only 20 people managed to predict this, whereas 36,000
simply did not see it coming at all, and one factor that has emerged is that
the people who seem to have the best understanding are the ones who are able
to look at a very big-picture take on the economy and actually try and
understand exactly where the economy is in context.
As long term readers of this column
know, MBMG has long believed that the economy is cyclical and that there are
four main aspects or seasons, as we call them, to that cyclicality. We see
it almost as a western type year with Spring and Summer followed by Autumn
and Winter. If you look at the current cycle, we think that the last Spring
cycle started in 1949 when the Great Depression ended, and at that point the
Dow Jones Industrial index was at about 181 points. We started to see
growth; we started to see job creation; we started to see trade, and that
ran for a period of probably about 17 years up until around 1966. That is
when Spring ended and Summer started, and the difference between them was
that economic Summer is a period when we get much more leverage, much more
borrowing and people are feeling good because there is so much trade, and
that brings a lot of growth and also debt into the economy. The debt fuels
the growth but it also fuels inflation, and so that tends to be a period
that is good for commodities and real estate, but it causes head winds and
problems for bond markets and equity markets because interest rates
generally tend to get raised.
We think that phase lasted until the
end of the Seventies, and the Dow Jones, which had risen from 181 to 968
points in the Spring cycle pretty well went nowhere and actually fell back
to about 838 by 1980. The price of gold, which in the Spring cycle had not
really gone anywhere (it had moved from $31/32 to $35 an ounce), suddenly
shot up to $850 an ounce in the Summer cycle. At the end of Summer, we got
high interest rates and high inflation, and that tends to lead to what we
call the Autumn phase of the cycle, which is where we see disinflation
coming in. That is a slowdown in the inflation rate and a slowdown in the
rate of leverage. It is a very healthy period for stocks, but it is quite a
bad period for precious metals and commodities, so from 1980 to around 2000,
we saw the Dow Jones go from 838 points up to almost 12,000 points, which is
a huge leap, but we saw the price of gold fall back from $850 to $250 an
ounce.
Since 2000, we have been fairly sure
that the western world is in what we call an economic Winter. This is a
really deflationary time and a very difficult time for most asset classes.
Certainly for stocks and real estate it is not very positive, and the
deflationary impact can sometimes be pretty negative for commodities as
well. We think that is the phase of the cycle that the western world is in
right now, but what we are not sure about is how much longer this is going
to last.
We think ASEAN economies entered the
economic Winter, the deflationary part of the cycle, in around 1996/97, and
we think that they took a lot of the right measures. They actually dealt
with a lot of the debt problems, and we think South East Asia is actually
exiting the Winter cycle and will soon start a whole new Spring cycle and
take off and do really well again, but we think the western world is still
somewhere in the Winter cycle. Trying to understand what the global economy
is going to do really depends on how close you think we are to the end of
Winter and the start of Spring, or whether you think we have still got some
long dark winter days ahead for the global economy.
One thing that we are very aware of is
that sometimes, even in the middle of Winter, you can get one or two really
nice days and you start to think that maybe Spring is starting, but then all
of a sudden you find yourself out without a coat and you get drenched with
rain and freezing cold. So we are a little bit worried about the effect of
the QE policies the US and UK governments have been adopting and the
bail-ins and bail-outs the European governments have been adopting. We are
concerned that what they are doing is hiding the symptoms without really
dealing with the problems or curing the disease and, therefore, it might
look like we may be further ahead with the recovery and further through the
Winter period and getting into Spring than we really are.
There is a very good precedent for that
historically in 1931, when everyone celebrated the end of the Great
Depression in the States and in the western world, and then in 1932, they
had what is called the 'Tragic Year' when they actually found out that it
really was every bit as bad, if not actually far worse, than they had
anticipated. I think there's a little bit of a note of caution that people
should be sounding about the western economies. We do not really understand
how we could be coming out of the Winter cycle when there is still so much
of a debt burden still hanging around those economies, and we think that
they have still got a lot of work to do. Thus, we are concerned about the
impact that those economies are going to have on the global economy moving
forwards.
We are still concerned that the Winter
for western economies looks like dragging until the end of the decade.
Japanese-style lost decades or 1930/40s Great Depressions are recurrent
phenomena throughout history - and generally they are made far worse by the
involvement of megalomaniac politicians like Hoover, Roosevelt, Merkel and
Sarkozy who cast themselves in the role of an economic King Canute, hoping
to stay the economic tide simply by commanding it, but doomed to embody the
inability of man to hold back the forces of (economic) nature.
"You say I can do anything," Canute
said to the courtiers. "Very well, I who am king and the lord of the ocean
now command these rising waters to go back and not dare wet my feet." But
the tide was disobedient and steadily rose and rose, until the feet of the
king were in the water. Turning to his courtiers, Canute said: "Learn how
feeble is the power of earthly kings. None is worthy the name of King but He
whom heaven and earth and sea obey."
It can only be hoped that those in
charge will learn from history.
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The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Stephen Tierney on stephen@mbmg-international.com |
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