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Stocks are trying to rebound off an ugly morning, and it’s a long day still ahead and a long week ahead too if the Greece drama is going to be the driver.
Chart of the Day – How sure are you that rates have put in a long-term bottom? Could mortgage rates in the US get down to 2% in the next few years? Could we some day see a 1% 30-year mortgage? Ten years ago, I never thought we’d see 3% 30-year mortgages but we have.
Go Nowhere Markets – For the last few months, pretty much for the whole of 2015, the markets have been rangebound. The $DJIA was above this current level as far back as last November.
Google vs Facebook – Facebook is just starting to create revenue streams from advertising, sponsorships, payment transfers, and who knows what else for their three billion-user platforms: Facebook, WhatsApp and Instragram.
The market sees the potential of these billion-user platforms of Facebook’s, and that’s a small part of why Facebook is now valued upwards of a quarter of a trillion dollars. When I first started buying Facebook in the $20s I used to explain how cheap Facebook was versus its earnings potential of just two to three years out because Facebook just needed to generate a few pennies per user per day:
So here’s that math I talked about before and how Facebook FB gets to a $200B market cap. Their valuation right now is just under $70 billion. Last years’s revenues were about $3 billion so that’s 22x sales, let’s say 20 for good measure. Facebook says they have 900M monthly-active-users (MAUs), a 33% jump from the years before. So let’s say the prices/sale multiple holds over the next 5 years, that would mean Facebook would need $10 billion in revenue to get to a $200 billion market cap. But let’s halve the multiple to 10x sales, so we’re looking for $20 billion in sales. And let’s say that explosive MAU growth slows by a third to 11% for the next 5 years, that would give Facebook 1.5 billion engaged users. Divide that $20 B in revenue by the 1.5 and you get that at that depressed multiple of 10x sales, will anemic future user growth, if Facebook generates $13 in revenue per user per year, it’s at a $200 B market cap.
Facebook’s 50% bigger in its user-base now, here a couple years later and is indeed generating a few pennies per user per day.
In some ways, Facebook is still a bit “cheap” if you’re willing to look out another three or four years and see that the company just needs to generate a few more pennies of revenue per user per day in 2017 — a few pennies a day would another few billions of dollars in revenue per month reported each quarter.
Google’s Chrome, YouTube and Android apps each have at least one billion users too, and Gmail has nine hundred million users.
Top of the head, back of the envelope, sum of parts for Google’s businesses:
- Youtube $80-100BB,
- Chrome $3-5BB,
- Search: $100-150BB,
- Ad network: $150-200BB,
- Gmail: $5-10BB,
- Android: $100-150BB,
- Rest of business: $10-20BB.
I come up with a sum of parts valuation of: $450-600BB.
Is Android going to create hundreds of billions of dollars for Google shareholders in the way that Facebook’s platform has for Facebook shareholders? That’s the crux of the issue for shareholders ahead and it’s not entirely clear yet.
That’s why Google’s stock is struggling to break out for the last couple years. So Facebook’s worth $270 billion and Google’s worth about 30-40% more than that right now.
If Google can create another couple hundred billion dollars of value out of Android and/or YouTube in coming years, making my valuation assumptions above too small, the stock will triple or more from these levels. If Google fails to grow Android into a sustainable dominant business kicking off huge cash, Google’s probably going to still be stuck somewhere near these current levels.
