[kumarvvr]

The stockmarket is like a round robin thingy, putting it lightly.

All those who hold shares in FB, combined, are holding paper that is worth 900B. However, if even 10% of those wanted to sell their holdings at a time, the price would fall and the total holdings would be worth less for all.

Now, why are they holding the shares then? Two things come into play. Firstly, say 5 years down the line, the holders have confidence that FB will still be making money, be profitable and be on the market. Secondly, that five years down the line, there is someone else who is willing to pay for the shares at a premium of what they have originally purchased for. Now what about those who are buying 5 years down the line? They too must have confidence on FB that a further 5 years or more down the line, FB will be profitable and will be in the market and keep earning money. And so on and so forth.

So is FB really worth 900B, yes, if the holders keep holding it and FB keeps earning profits.

Can everyone get their worth from the shares? Not at once. Not in a hurry.

[bredren]

For highly valued tech stocks I’d add that there is some presumption that these companies will acquire or build their way into major new sources of revenue that throw off vast profits.

With tech this might be implicit if they are “profitable and still in the market.” But it is different than say John Deer or Miller Paint in that regard.

[jldugger]

> The stockmarket is like a round robin thingy

Or perhaps a medieval wheel of fortune.

[1]: https://www.sciencephoto.com/media/539503/view/the-wheel-of-...

[ehsankia]

I was thinking like a game of musical chair. If you sit down too early to lose, but when the time comes, you better sell quick or you'll be left standing with nothing to show for it.

[tootie]

Like that kid with a billion dollars of crypto. If he ever tried to spend it, he'd crash the value.

[blihp]

In other words, the greater fool theory.

[nl]

No, the opposite.

The value of a company in a fair market is a function of the confidence of investors that someone in the future will pay more for the same stock.

For a highly profitable company like Facebook, this isn't a foolish confidence in anyway. Even if you don't like Facebook it would be a very radical position to take to think that their profits next quarter will be remarkably lower than this quarter.

In greater fool theory, you know there is no reason the investment is going to increase in value. You are just hoping someone else is going to buy from you and accept that risk too.

[blihp]

Thinking like that is what drove AOL and Yahoo! to their peak valuations. It's not that the companies didn't produce something of value and have some level of earnings, it's that their stocks priced in a fantasy land future that could never be achieved. At some point, there will not be someone willing to pay more, or even the same amount, for the stock.

When you are counting on the 'confidence' of future investors to (over)pay more than you did for something, rather than any rational valuation, you are quite literally counting on a greater fool[1] being willing to buy it from you.

[1] https://en.wikipedia.org/wiki/Greater_fool_theory - note that it isn't always about an asset having no value, just that for an overpriced asset that there will be someone else willing to pay more for it.

[nl]

Sure, one could argue that AOL and Yahoo were overvalued at their peak. They had low existing earnings and the price was supported by expectations of magical new profits.

But that's a difficult argument to make for Facebook. Facebook is highly profitable - they have averaged something like 80% gross profit margins for a decade[1] while sustaining significant revenue growth. That's pretty much guaranteed that their stock will continue to appreciate - with margins that high they have a lot of room to play with things to keep growth going.

What metric makes it look like that is a greater fool situation?

[1] https://www.reuters.com/companies/FB.O/key-metrics

[gen220]

I don’t think you can make an argument against the present valuation of FB on a historical performance basis.

Investors will tell you that historical performance does not guarantee future performance. It’s one yardstick, but it’s not always the best one.

Facebook’s historical revenue growth was catalyzed by environmental factors that are shifting underneath them.

In 2021, FB would not be allowed to acquire Instagram or WhatsApp. In 2021, Apple (custodians of their most valuable user base) is no longer cooperating with adware.

What does future revenue growth for a Facebook look like, who is not allowed to acquire upstart competitors, who is not allowed to extract maximum value from its mines, and who is facing regulatory scrutiny for past deeds?

Would you be willing to bet that $900B, or $300ish/share on $30 revenue/share have these uncertainties priced-in?

Yahoo! and AOL were dumpster fires in comparison, of course. But I wouldn’t be so certain that FB hasn’t passed its peak valuation, just because it has had a money printing machine for the past decade.

[nl]

Despite all these technology challenges we love to discuss on HN, the truth is that last quarter every single metric except US/Canada daily FB users was up. Daily US/Canada users fell by ~0.5% but this was more than offset by a 1% growth in EU.

Their average revenue per user increased by the largest amount ever (in both absolute and percentage terms) last quarter.

In terms of technology challenges, the iOS changes will reduce FB's ability to target ads. However, it is quite possible this will lead to more revenue for FB because the market structure (ie, domination by FB and Google) means FB maybe able to pass on the loss inefficiency to advertisers.

[berkes]

Not really. The crucial piece is the future profit.

[blihp]

Right, but notice that wasn't the emphasis of the post I was responding to. OK, there was 1/2 a sentence that touched on profits as almost an afterthought.

The thing that sets me off about these threads is the (I believe sincere) thinking that 'well if that's the share price, it must be worth that much'. That's fine if you're speculating/trading but is absolutely wrong if you think what you're doing is investing.

[nl]

> OK, there was 1/2 a sentence that touched on profits as almost an afterthought.

Are we reading different posts? The post you responded to repeatedly made the point that profits are one of the key builders of market confidence:

>> Firstly, say 5 years down the line, the holders have confidence that FB will still be making money, be profitable and be on the market.

...

>> They too must have confidence on FB that a further 5 years or more down the line, FB will be profitable and will be in the market and keep earning money.

...

>> So is FB really worth 900B, yes, if the holders keep holding it and FB keeps earning profits.

It's a key point of their argument!