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Kapitall: Facebook worth 36 Trillion Dollars?

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I get tons of mail from public relations companies. I call it quasi-spam. The PR companies are looking for me to write about their clients. Why wouldn't they send out such emails? Like spam, there is no cost and the potential, however small, that they'll get some benefit. Send out enough mails and you'll probably snare 5 bloggers. It's a numbers' game. Of all the mail I receive, 99% of it goes in the virtual trash within 10 seconds of me opening it.

Today, I'll cover one that didn't.

I got an email about Kapitall asking me to look at their Facebook video infographic. I thought that infographics are fairly cutting edge, but this is the first I've seen of a video infographic (3-D infographics and hologram infographics can't be far behind). Curiosity got the best of me, so I watched it:

Before I get to the point that I wanted to make about this video, can we all just have a little laugh at the irrelevancy of one fact in the video? The fact that I'm talking about is that Facebook's users spend enough time on the website each day (combined) to walk to the Sun and back twice. That's a mind-blowing odd thing to claim, but to make it even more crazy, the video shows people taking an escalator to the Sun and back. Clearly that's not an accurate description of walking and how could I have not heard about these Sun escalators before now?

Okay enough of my attempted humor. If I was funny, I might have a career in it and people would probably me for it. They don't.

Let's fast-forward to the 1:50 mark in the video. It shows that Facebook is likely to be priced at $40-50 for a valuation of $100-110 billion dollars. The video then goes to show a few things that you can buy with $50, like 6 movie tickets, 5 packs of cigarettes, or a video game. Then we get to the 2:07 mark where the video makes the case that if you invested $50 in several companies when they went public you'd have a lot more money.

One example is Microsoft. If you invested $50 in Microsoft in 1986, you'd have $18,000 today. The implication is that this is likely to happen with Facebook - especially after they showed you all these amazing Facebook stats. However, the reality is that Microsoft went public as a small company in 1986. Windows had just been released a few months before. Your investment in Microsoft could grow 360 times because you were buying a bigger piece of a company that had a lot more growth in it. (Hindsight is a beautiful thing.)

For Facebook to take your $50 investment and make it worth $18,000 it would have to be worth 36 Trillion dollars. To put that in perspective, the United States' Gross Domestic Product (market value for all goods and services sold) this year is $14.59 Trillion (according to World Bank). Facebook isn't in the same class as other companies like Apple and Google when it come to value today.

The next slide after the Microsoft one is that Facebook is just getting started. That may be, but as the rest of the video showed, Facebook has already had much of its growth spurt. That's already factored into the IPO price with the 100 billion valuation.

There are two lessons to be learned here:

  1. Don't buy into the marketing hype with the Facebook IPO - Can you make money by buying Facebook stock? I think there's a chance you could. However, keep in mind that Amazon's value is a little less and Ebay is half of what Facebook is expected to be. I think the chance is the same with these companies as with Facebook.
  2. Be critical of sneaky advertising - Kapitall's business is to get people to sign up and place investment trades through them. After watching this video the temptation is to go sign up and put your $50 to work to making you thousands. I'm clearly not against investing, but this advertising is very misleading. It makes me not want to trust Kapitall and further calls into question their claim on their homepage: "We do the heavy lifting. You get fresh market insights delivered daily, and intuitive tools to help you find and choose your stock picks. All for free." If these are the insights that they are offering for free, thanks but no thanks. I'll take my business to another company.

Posted on April 25, 2012.

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10 Responses to “Kapitall: Facebook worth 36 Trillion Dollars?”

  1. Luke P. says:

    Thanks for this. An insightful commentary to be sure. The one thing I would say is… this is definitely NOT a sneaky advertisement for Kapitall, it is a straight up, no bones about it advertisement for Kapitall (albeit in the form of a heavily sponsored infographic). I don’t think it looks like they’re trying to make it look otherwise. They’re in the business of making money off of trades – what a more perfect opportunity than this impending FB IPO to highlight they’re services? Provide a little hook to lure in new clients? Businesses do it all the time, no? All too often they do it much less compellingly than what is on display here. I’m not mad at this video at all.

    • Lazy Man says:

      I guess I consider it a sneaky advertisement because the entire focus is on Facebook another company and product.

      I’m not upset about most of the video infographic, just the part of the end that implied that $50 invested in Facebook is going to make you some serious money.

  2. So you’re saying that Facebook isn’t worth $36 trillion?

    Anecdotally, at least, it seems that a lot of successfully tech companies are holding off on their IPOs until they reach a more mature state.

    I think a big part of this the scalable cost structure. A software companies doesn’t need to spend millions of dollars distributing their product – creating the DVDs (Cd, floppies), paying to have them trucked across the country to retail stores, take back unsold product, etc.

    Instead, you can measure the startup cost in thousands of dollars. If you are successful, you build up the infrastructure as needed – you don’t need to have a massive server farm on day 1.

    In other words, you don’t need $50 million from an IPO to get a toehold in the marketplace.

    • Lazy Man says:

      That’s good analysis Kosmo.

      I probably should have been fair and tried to project what Facebook would be worth 26 years from now… since Microsoft had 25 years to make those 36,000% returns. In reality that is only 14.8% compounded year over year for 26 years.

      Depending on whether it is hardware or software, I agree with you about the $50 million from the IPO to get in the marketplace. For software, the cost can be less, because it is just implementing a great idea (for example, Twitter or Pinterest don’t need IPOs). If you are trying to compete with Google and Apple on smart phones, you better have more than just $50 million from an IPO.

  3. “since Microsoft had 25 years to make those 36,000% returns. In reality that is only 14.8% compounded year over year for 26 years”

    I think you’re off by a decimal place. 50 X (1.148^26) = $1809, not $18,000.

    You’d actually need a 25.4% annual return compounded annualy to turn $50 into $18,000.

    • Lazy Man says:

      Right you are… I thought that was oddly low.

      It makes much more sense at the 25.4% annual returns. Anyone pinning their hopes on those kind of gains are not likely to be happy with their investment.

  4. Elle Navorski says:

    The slide showing PG, WM, and MSFT’s returns does not represent reality.

    First, Lazy Man is right about the age of the company at the time of its going public needing to be considered. Reinforcing Lazy Man’s points is this study of 1234 IPOs from 1991 to 1997: http://www.stern.nyu.edu/cons/groups/content/documents/webasset/uat_024338.pdf

    Second, the slide showing PG, WM, and MSFT’s alleged performance does not take into account PG’s spinoffs over the decades. As Jeremy Siegel has pointed out in his books, these spinoffs add up to a lot. For example, in 2002, PG spunoff Jif and Crisco, selling to Smucker, and PG shareholders received one share of Smucker for every 50 shares of PG. In 2012, PG is supposed to complete a sale of Pringles to Kellogg. Other spinoffs have taken place over the decades.

    Third, for a fair comparison, one must start from the same date. Microsoft was the last of the three corporations to go public, on or about March 13, 1986. So the chart below starts March 13, 1986. Alternatively, one must start from the IPO date and examine performance over an equal number of years starting from the IPO date.

    Fourth, reinvested dividends are not taken into account. The chart below takes them into account.

    What $50 invested on March 13, 1986 would be worth today if invested in these three companies, taking into account reinvested dividends but disregarding spinoffs:

    PG $1310
    MSFT $19,988
    WMT $1537

    What would $50 invested on January 1, 2000 be worth today (including dividends but not spinoffs)?
    PG $79
    MSFT $35
    WMT $51

    The Kapitall presentation also disregards general risk of IPOs. Just one of many hits on the subject: “According to the Wall Street Journal, ‘More than half of the U.S.-based companies making their domestic stock-market debuts this year are trading below their offer price.’ ” http://myportfolio.usc.edu/danieleb/2011/09/ipos_worth_the_risk.html

    • Lazy Man says:

      Wow, Elle. That’s certainly going above and beyond to prove the point.

      I like your chart covering the last 12 years of the same three investments. On average you would have $55 or 10% combined over a 12-year span. Ouch.

  5. Evan says:

    Love the production but what a cheesy message. I get these all the time too (this and book reviews) and it is amazing how many PR people don’t even understand the basic product they are pushing.

  6. […] Man @ Lazy Man and Money writes Kapitall: Facebook Worth 36 Trillion Dollars? – If you invested $50 in Microsoft in 1986, you’d have $18,000 today. The implication […]

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