Home' Trinidad and Tobago Guardian : October 31st 2013 Contents "Just as the atom bomb was the weapon that
was supposed to render war obsolete, the Inter-
net seems like capitalism s ultimate feat of self-
destructive genius, an economic doomsday
device rendering it impossible for anyone to
ever make a profit off anything again. It s espe-
cially hopeless for those whose work is easily
digitised and accessed free of charge."
Author Tim Kreider, on not getting paid
for one s work
The era of the Internet has mor-
phed into the era of social
media and this craze is attract-
ing attention not only from
advertisers and marketers, but
also from investors as well. It
was on May 18, 2012, that the social media
site Facebook issued its initial public offering
(IPO). Shares were offered to the public at a
price of US$37 per share giving the company
a valuation in the region of US$100 billion.
This represents the largest valuation to date
of a company in the United States offering its
shares to the public for the first time.
Prior to the listing of Facebook, the company
bought the social media site called Instagram
for US$1 billion.
Overall in the social media space, there is
a long list of acquisition targets and those who
fend off being acquired in search of higher
valuations as their business model evolves. It
may seem reminiscent of the Dot Com Internet
doom of the late 1990s, although many say
"this time its is different".
In 1980 Apple became a publicly listed com-
pany with an IPO valued at US$1.20 billion.
At that time the company was valued at 25
times its revenues and 100 times its earnings.
So that you are clear the latter metric meant
that the initial shareholders of Apple were
prepared to buy the company at a price to
earnings (P/E) multiple of 100 times. The
Facebook valuation at IPO was US$100 billion
which equates to a price to earnings multiple
of around 100 times. Google, on the other
hand, outdid them both coming to market in
2004 at a valuation of US$23 billion. That
equated to a multiple of around 220 times
While all of the above companies are brand
name Internet companies, it is my view they
are not equal in that there is a fickleness asso-
ciated with social moods on the Internet. The
e-commerce landscape has remained fairly
constant, dominated by Amazon and eBay-
type business models. Google dominates the
search space and this, too, has been fairly con-
stant. Yet when it comes to social media, the
fads have changed from America On Line
(AOL), instant messaging services, right up to
MySpace and now Facebook. Currently, there
is Linkedin and Twitter to contend with in
that space. The list continues to grow.
The fickleness of social media is already
apparent with anecdotal evidence to suggest
that people are moving from Facebook to
Twitter and, soon enough, onto the new craze
Snapchat, although it is not clear at this stage
whether any of these platforms will become
mutually exclusive. It does, however, create
an issue from a valuation perspective where
significant growth rates are required to justify
It is the last mentioned name that now is
at the crucial IPO juncture. Twitter is set to
go public on November 6, 2013, issuing an
expected 70 million shares to the market at
a price range estimated to be between US$17-
US$20 per share. The IPO is seeking to raise
up to US$1.6 billion and values the company
at US$11 billion.
US$11 billion is not a bad number for the
existing shareholders of company that is yet
to turn a profit. However, what about the new
shareholders purchasing into the IPO? In 2012
the company tripled its income to US$317 mil-
lion, but still turned in a loss of US$79.4 mil-
lion. This shows that expenses are increasing
at a faster pace than the revenues, the result
of research and development geared to wow
a user base that has seen a 39 per cent increase
year on year and currently stands at 232 million
monthly active users.
Users seems to be the key metric driving
the push into the social media space and
investors are prepared to pay a premium for
companies that can capture as many eyeballs
or rather mobile phone screens as possible.
The Twitter IPO raises a couple interesting
issues. First, there is the issue of value versus
price. It was Warren Buffet who said "price
is what you pay, value is what you get". In the
context of the Facebook IPO, I cautioned
against investing in the IPO at the time because
the share price at the time of the IPO reflected
a company that was priced to perfection. At
a multiple of 100 times earnings in a market
then trading at 12-13 times earnings, Facebook
had to be running straight out of the blocks
and there was no room for hiccups.
It did not and the stock priced plunged to
the teens, reflecting significant losses for
investors. The point was there was no value
for the investor in the IPO price at the time,
all the value was taken up by the issuer in
terms of how they arrived at the price of the
stock. Today, the stock is trading at US$50,
which is a 35 per cent gain from the IPO price.
Once again investors are asked to consider
whether there is value at the current price.
For an IPO, it is about understanding the
price more than the value associated with the
The second issue to note is that it is in fact
possible to value a company that is not making
a profit. As mentioned earlier, Twitter is in a
loss-making position and the company has
never generated a profit from inception. So
how then can you attribute a value to the
The traditional method of applying a mul-
tiple to earnings does not apply since there is
no earnings. What is often done in cases such
as these is to use a multiple-to-sales approach.
The multiple is determined by looking at the
multiples at which similar companies are trad-
ing at. For example, the names that are cur-
rently associated with Twitter are Facebook
and LinkedIn. These trade at sales multiples
of around 17 times.
Assuming the company can grow revenues
to US$500 million over the next 12 months
and applying the multiple of its competitors,
you get a valuation of around US$8.5 billion.
One can use other valuations methods to come
up with estimates of value.
Taking the two points together, it should
be noted that the value can and maybe will
be completely different to the price. We saw
it clearly in the First Citizens IPO where the
company came to market at a certain valuation.
However, the demand for the stock resulted
in a disconnect between price and value to
the extent that upon listing the price jumped
Over time there can be a convergence
between valuation and price. In the case of
Facebook, the price fell to catch up with the
valuation and, in the case of First Citizens,
the price rose based on a more conservative
valuation. Either way, it is the disconnect
between price and value that creates the oppor-
tunity for investors at an IPO.
When the final details of Twitter comes
out, it would be interesting to see how this
dynamic plays out. How much the company
leaves on the table for investors, if any thing
at all, will determine how this dynamic evolves.
In the meantime, the battle between Likes,
the Facebook users stamp of approval and
retweeting, the Twitter users stamp of approval
will heat up.
There is a natural limit to how much time
we can productively spend on these media,
so stepping back to view the overall social
media space, it is interesting to see who will
win the battles that lie ahead and for how
Ian Narine is a broker registered with the
Securities and Exchange Commission.
BG18 | COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 2013 • WEEK FIVE
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