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Value Facebook like Apple — and its worth plummets

Many people would argue that Apple is the strongest company today. The way it makes money, it almost resembles a bank. But if you applied the Apple valuation on Facebook’s revenue, Facebook would trade at about $12 billion, not $57 billion (as of market close June 6, 2012), down from more than $100 billion on its inaugural IPO date.

Also, if you look at other great companies, such as Oracle, Microsoft or SAP, and their valuations on revenue or on EBIT, those companies trade between $10 billion and $14 billion.

I’m basing this off of the barometer my team uses. Each quarter we introduce the MW IT Index. Our market-weighted-value index takes the market value of 120 companies grouped into four technology categories: IT services and business process outsourcing, IT supply chain services, software, and SaaS. The index assigned a value of 1,000 to each composite group on December 31, 2008, and it has tracked the category performance since then.

Bottom line is that SaaS companies are trading at a premium of 150 percent or more from the other segments according to our latest quarter.

Facebook initially traded at about a 300 percent premium above such SaaS companies as Salesforce.com.

Facebook was trading at 30 to 40 times revenue, compared to companies in the IT products and services space that are trading at four to 10 times EBITDA and SaaS companies that are trading at two to five times revenue. If Facebook’s financials were in the IT Services space, it would be valued between $4 billion to $6 billion, not $57 billion.

It just shows that the space you are in matters. SaaS, IT services, IT BPO and IT supply chain companies are valued quite differently than Facebook.

But people must remember that when they invest in Facebook, they are investing in a company with assumptions that are going to be very difficult to achieve over time. Assumptions that leave little margin for error are built into the price of the stock.

For example, in the ’90s, Cisco was going to be the first trillion-dollar company. But they didn’t make it. The reasons why do not matter — what does matter is that a very high bar was set.

So, the Facebook market expectation is set as high as they have ever been. In addition, Facebook’s CEO, Mark Zuckerberg, was quoted as saying in a recent article in New York Magazine, “We don’t build services to make money; we make money to build better services.”  Most companies must do the opposite — make money then build better services. This is bearing out in the market reaction.

Today, Facebook has almost $4 billion in revenue and a billion in earnings. That is a real company. But, the market expectation might not be real yet, and there is little, or no, operating margin of error for the company to make its mark.

Plus, when we look into the future at possible competitors for Facebook, we don’t know who they are. They are probably in college or in a garage. That is why Warren Buffet does not invest in technology companies. Today’s technology darling can be obsolete tomorrow.

If you want to look at out-of-sight valuations, look at the SaaS space. If you want to leave the galaxy, look at Facebook.

We will see if they can meet expectations five years from today. That is possible.

The news that GM pulled its advertising will have little bearing on Facebook’s valuation. By the way, I assume you saw that Warren Buffet recently bought 10 million shares of GM.

Marty Wolf is the founder and president of martinwolf, a leading middle market IT M&A specialist. Since 1997, he has guided buyers and sellers in the IT services, business process outsourcing, supply chain and software industries through more than one hundred transactions, including divestitures of Fortune 500 divisions. 

Image courtesy of Flickr user 401K.

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Is Detroit buying Verizon’s LTE-connected car vision?

AT&T may have its sights set on connecting the home, but its archrival Verizon Wireless has a more mobile target in mind: the connected car. It has long talked up its dream of connecting anything with wheels and a motor to its LTE network, but in recent weeks it has gotten even more aggressive in the automotive space.

VZW’s parent company Verizon Communications revealed Friday it is buying up Hughes Telematics, which powers M2M applications in both consumer and commercial vehicles. On Wednesday, Verizon announced the formation of the 4G Venture Forum for Connected Cars, whose mission is exactly what that name implies: finding ways to use LTE to power future automotive telematics applications.

BMW, Honda, Hyundai, Kia and Toyota have all joined the Forum, but the Big 3 automakers from Detroit are all absent. That’s surprising given how closely Verizon has worked with U.S. automakers on concept vehicles and apps in the past and considering how aggressive Ford and General Motors have been in the connected car space.

Their absence may just be a matter of timing – the venture just got off the ground today – but it also might be attributable to the fact that U.S. automakers’ visions for the connected car aren’t entirely aligned with Verizon’s. They don’t necessarily want LTE in the car – at least not embedded in the dash.

While U.S. automakers embrace the idea of embedded radios for emergency services and vehicle-to-vehicle telematics, when it comes to infotainment they would rather you brought along your own connectivity. Two of the biggest connected car platforms, Ford’s Sync and Cadillac’s CUE, depend on drivers using their own smartphones to link their apps to the network.

The logic is sound: consumer vehicles have long replacement cycles. Meanwhile consumers trade in their smartphones for more sophisticated models every 18 months. Any radio, processor or platform technology an automaker embeds in a car could become obsolete within a few years. As a new technology, LTE will have a long overall shelf life, but like any wireless technology its performance will improve gradually. New smartphones will be able to take advantage of those improvements in speed, capacity and efficiency, while the radios embedded in the chassis of your car will not.

Embedded connectivity will come – just not in a 4G guise

Many governments are requiring that all future cars have some form of embedded connectivity for safety reasons. And it looks that embedded M2M modules will come standard in all future electric vehicles to assist with power management. It seems like those trends would represent a big opportunity for carriers to entrench their 4G services into the dashboard. But don’t hold your breath, Airbiquity marketing VP Leo McCloskey told me in a recent interview.

Airbiquity provides technology for connected car platforms, and McCloskey believes that automakers will tackle embedded connectivity in the car with the barest of radios. GSM/EDGE networks will have more than enough juice as well as the necessary coverage to supply basic emergency call and location services and enable key applications such as remote door unlocking and tamper alerts. The big bandwidth infotainment apps, however, will continue to rely on the smartphone as a conduit, McCloskey said. “They’re going to keep in-car connectivity very low speed,” he said.

If the LTE-connected car never comes to pass, Verizon won’t be able to rake in millions of new 4G subscriptions, but it still stands to benefit plenty. The data may be piped through the phone, but these apps will still need LTE-levels of bandwidth to feed the rear-seat video monitors, 3D navigation systems, surround-sound stereos and other infotainment apps making their way into vehicles. It’s one connection, but a connection that consumes many more gigabytes.

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