The revelation that Facebook’s deal with Goldman Sachs and Russian investor Digital Sky Technologies values Facebook at $50 billion—more than twice the current market capitalisation of Viacom—reminds me of similar hype that accompanied Yahoo’s surpassing of Viacom’s market cap more than a decade ago.
While I have been unable to dig up the original report that I wrote at the time, I remember enough of the details to hopefully make the story worth retelling. Between March and November 1998, Yahoo’s market capitalisation soared from $4 billion to almost $19 billion. (According to SecondMarket, Facebook’s valuation has soared from $11 billion in December 2009 to $50 billion today.) As a young(ish) equity analyst at Hambrecht & Quist, I had the audacity in July 1998 to downgrade the stock of Yahoo from a BUY to a HOLD based on valuation concerns even though I was well-known on the Street as a long-time Yahoo bull.
The real crux of the downgrade was that no matter how I tried, I just couldn’t get comfortable with the thought that Yahoo—while growing faster than just about any company before it—was worth more than Viacom, whose revenues and profits were a multiple of Yahoo’s. While I had been covering Yahoo for a number of years since its 1996 IPO, I just couldn’t perceive how the company, even as it was defining the way we used the Internet, was worth more at that point in time than the media colossus Viacom (which I had covered for years before that as a finance reporter at Variety). My downgrade proved prescient for a couple of weeks—Yahoo’s stock price dove more than 30% in late summer along with other Internet stocks over concerns about the Russian economy. This did little to deflect the heated feedback from both my own institutional sales force and buy-side accounts (I still remember Alberto Vilar—then riding high atop Amerindo—screaming at me about how little I knew about valuation and how I would never make it on Wall Street). Reporter Saul Hansell noted my call in the pages of the New York Times, labelling me a “virtual Jeremiah” for even daring to question Internet valuations. But in the autumn, Yahoo stock’s resumed its dizzying upward ascent, proving me and anyone else who dared to question Internet valuations at that time very, very wrong.
A decade later, Yahoo’s market capitalisation is $21.3 billion, and the company is seriously hampered by the lack of a clearly defined strategic vision. Revenues stand at about $6.5 billion with cash flow (EBITDA) of $1.4 billion.
Viacom’s market cap today stands at $24 billion despite revenues of $12.5 billion and cash flow (EBITDA) of $3.3 billion.
Facebook on the other hand is poised to dominate social media marketing and (perhaps) social commerce. Its user base dominates anything that came before it: more than 500 million active users with 50% of its active users logging on to Facebook in any given day. According to Facebook itself, people spend over 700 billion minutes per month on the site. In terms of revenues, the number being bandied about for 2010 is $2 billion (no publicly available numbers exist as Facebook is still private). If that number proves correct, Facebook will have reached that revenue milestone faster than Google, which did it sometime between years five and six, and Yahoo, which reached that revenue milestone in its ninth year. Like Yahoo—and more recently Google—before it, Facebook is defining the way we use the Internet.
Fortunately for me it is no longer my job to try to divine what publicly traded equities are worth. But it might be wise for investors to question for just a moment the current valuation hype surrounding Facebook and other private Internet companies (Zynga, Groupon). These companies may very well someday grow into and even exceed the lofty valuations placed upon them today. But for some of us this storyline seems eerily familiar and the ending may not necessarily be as predictable or uplifting as it currently seems.–PN
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