The Economics of the Madhouse

Gangaweed

So facebook paid an over inflated price with over inflated stock. Big deal.

Most tech businesses are extremely profitable by nature - its not uncommon to see net profit percentages of 40% when a business scales, and whatsapp definitely is scaled!

Generali

Gangaweed wrote: »

So facebook paid an over inflated price with over inflated stock. Big deal.

Most tech businesses are extremely profitable by nature - its not uncommon to see net profit percentages of 40% when a business scales, and whatsapp definitely is scaled!

Paying that much for so little is a big deal.

antrobus

Generali wrote: »

Paying that much for so little is a big deal.

I'd be inclined to point out that even 40% of 99 cents ain't that much.

Gangaweed wrote: »

...Most tech businesses are extremely profitable by nature ...

Yeh right. Five seconds on Google

Twitter notched $132 million in losses... Box (cloud storage) ... reported a net loss of $169 million ...Coupons.com reported a loss of $14 million

http://www.inc.com/jeremy-quittner/alibaba-coupons-difference-in-losses-tells-story.html

antrobus

Generali wrote: »

....Facebook paid $19,000,000,000 for WhatsApp. ....

This article says it was $22,000,000,000. I don't know if that matters.

http://techcrunch.com/2014/10/28/whatsapp-revenue/

Generali

antrobus wrote: »

This article says it was $22,000,000,000. I don't know if that matters.

http://techcrunch.com/2014/10/28/whatsapp-revenue/

Either way it looks like a rotten deal for Facebook. :money:

vivatifosi

I just don't understand the pricing model for tech companies. It always seems like they are playing with monopoly money. I get that the intangibles are different to bricks and mortar, vanilla companies, but the pricing and failure rates make my eyes water more than chopping onions.

How many of these were worthwhile?
http://www.businessinsider.com/the-most-expensive-tech-acquisitions-in-history-2014-8?op=1&IR=T

Generali

vivatifosi wrote: »

I just don't understand the pricing model for tech companies. It always seems like they are playing with monopoly money. I get that the intangibles are different to bricks and mortar, vanilla companies, but the pricing and failure rates make my eyes water more than chopping onions.

Ultimately the valuation metric is the same: if you buy shares in a company, any company, then you buy a share of a bunch of assets which can potentially be sold plus a cash flow.

If there are no assets and little cash flow then you're buying what's left: nothing.

michaels

Surely as with anything else a share is worth what someone is willing to pay for it. For me personally a Picasso is not worth 60 million but that doesn't mean they won't sell for that.

Generali

michaels wrote: »

Surely as with anything else a share is worth what someone is willing to pay for it. For me personally a Picasso is not worth 60 million but that doesn't mean they won't sell for that.

Of course that is true but if you are buying something on behalf of the shareholders of a company then you need a metric beyond it's worth what I pay for it.

Gangaweed

Generali wrote: »

Paying that much for so little is a big deal.

Its not the first time someone has overpaid in an acquisition and it won't be the last.

Remember Time Warner's dreadful acquisition of AOL, Murdoch's of myspace or Microsoft's of Skype (which on fundamental measurements was even more expensive).

My guess is that Whatsapp will do $250M a year in profit and yes $22BN is a lot to pay but just remember, they were paying an overinflated price with an overvalued stock.