Comment by nl | Hacker News Reader

Comment by nl | Hacker News Reader

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Why?

At least Techcrunch provided some reasoning.

Your prediction is worded in a way that makes it hard to argue with, because "relevant" is so subjective. I know a lot of artists find MySpace VERY relevant.

However, to attempt a rebuttal, taking the Facebook case:

If Facebook is to become less relevant than it is now I would argue it's growth would have to stop, or at least slow down. According to the linked article it is currently accelerating, and usage of Facebook APIs OUTSIDE of Facebook is increasing enormously.

Growth like that doesn't just stop, unless there is some external factor.

So far, Facebook have proven themselves to be reasonable technically skilled, so I'll rule out technical problems.

It's possible some kind of legal issue could slow them (privacy lawsuits or something?). However, lawsuits take such a long time to play out that it would probably be at least 2-3 years before any negative verdict against Facebook would make them change what they are doing, and even then it won't shut down the site. If Facebook have 2-3 years more sustained growth it would be unprecedented for them to shrink from half-a-billion users to something less relevant than MySpace in another 2 years.

Another good counter-argument is the likely-hood of an IPO in the next 5 years. Apparently, Facebook had $700 million in revenue last year, and should do $1.1 billion this year (http://www.insidefacebook.com/2010/03/02/facebook-made-up-to...). If they IPO'ed now, with a P/E ratio of 20 (Google & Apple = ~24, Microsoft = ~ 17), then they'd be a $20 billion company. That buys a lot of relevance.

EDIT: Note that is a revenue figure, not an earning (as pointed out below), so the numbers are wrong. I'll leave it here, though, because the point is more important than the numbers - if (when) Facebook IPO's they will raise a LOT of money.

I think you confused P/E ratio - the E stands for earnings (profit), not revenues.

Facebook's P/E ratio is almost certainly negative at this point, but they are growing so fast that P/E ratio is not a good way to predict their market cap.

Umm yeah. Fair point.

I agree it's pretty crazy to try & predict this, but still... If they have profit margins similar to Google, then they'd still be a $7 billion company (and I'd argue their P/E will be much higher when they float)

> Growth like that doesn't just stop, unless there is some external factor.

Why? MySpace's growth slowed. Nothing grows infinitely--the math doesn't work. There is always a limiting factor that slows growth eventually, whether it be external or internal.

What is the basis for the "P" in your "P/E" calculus?

He was picking an earnings number ($1 billion-ish) and a P/E ratio (20ish) and solving for the P.

Of course, the $1 billion is revenue, not earnings, so that number is likely to be lower (or negative) and the ratio is likely (if history is any guide) to be higher due to that, so this kind of calculation is pretty pie-in-the-sky.

The shareprice, based on a fixed P/E. If their earnings are $1 billion, and their P/E is 20 (similar to Google), then their cap is $20 billion. See http://en.wikipedia.org/wiki/P/E_ratio

(Note the error I made above regarding their earnings, though)

So you assume comparable P/E to other much larger and more established companies, in order to arrive at a fanciful market cap number, in order to prove...something. No wonder these bubbles keep bursting.

Not at all.

Bigger, more established companies generally have (much) lower P/E ratios that new companies (eg, Google had a P/E ratio of 118 at their float price, and had a lot of criticism for pricing too low. See http://www.businessweek.com/technology/content/aug2007/tc200...).

I'd be very interested in what you think a non-fanciful market cap number is - and how you arrive at it!

My point is that when they float, they will raise a lot of money. It might be $5 billion, it might be $20 billion, it might be $50 billion. In any case, they are going to be sitting on a big reserve of cash.

Your point was that they will be irrelevant in 5 years. My argument is that - ignoring other factors - any company in the tech sector sitting on a few billion dollars in cash is far from irrelevant.

"I'd be very interested in what you think a non-fanciful market cap number is - and how you arrive at it!"

Market cap is defined as "a measurement of size of a business enterprise (corporation) equal to the share price times the number of shares outstanding of a public company".

My point all along is that you are engaging in wild, unfounded speculation about a non-public company, using wholly inappropriate metrics.

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