I am no Facebook bull. But the financial logic in this article is lacking.
Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to 4 points (β=2) of excess losses. The author argues Facebook dragged down the NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index jumped over 1 point intraday to 18 [1]. I don't smell blood yet.
Macquarie sees “no near-term financial model that will drive the $2 billion valuation.” Cross-posted below is my back-of-a-napkin work from a prior comment [2]. Development kit sales are not a perfect predictor of consumer sales. That said, they provide a snapshot of present enthusiasm for Oculus. They are also useful for forming ballpark estimates.
Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year and 7 months since August 2012 [2], when Oculus VR began selling its development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000 kits were sold in 2013. Let's say these keep selling at the $350 the Developer Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into $2 million of profits - a 10% margin.
Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag would not make sense.
Companies are not immortal. Let's value Oculus VR as a 20-year growing annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's FCF would have to grow at least {45%, 58%, 71%} a year.
Facebook fell 7% in trading today. The NASDAQ fell 1.4%. So we have 3 (β=3) to 4 points (β=2) of excess losses. The author argues Facebook dragged down the NASDAQ today. Let's suffer the assumption. Using the S&P 500's 0.7% fall we see 5 to 6 points of excess losses. On a day the NASDAQ 100 Volatility Index jumped over 1 point intraday to 18 [1]. I don't smell blood yet.
Macquarie sees “no near-term financial model that will drive the $2 billion valuation.” Cross-posted below is my back-of-a-napkin work from a prior comment [2]. Development kit sales are not a perfect predictor of consumer sales. That said, they provide a snapshot of present enthusiasm for Oculus. They are also useful for forming ballpark estimates.
Oculus VR says it has sold 75 000 "development kits" [1]. It has been 1 year and 7 months since August 2012 [2], when Oculus VR began selling its development kits. Let's assume a 200% YoY 2013 growth rate - that means 56 000 kits were sold in 2013. Let's say these keep selling at the $350 the Developer Kit 2 goes for [3]. That's $20 million in 2013 revenues. Let's turn that into $2 million of profits - a 10% margin.
Let's value Oculus VR as if it were a growing perpetuity. If Facebook had a cost of capital of {10%, 20%, 30%}, Oculus VR free cash flow (FCF) would have to grow at least {10%, 20%, 30%} a year. Otherwise, its $2 billion price tag would not make sense.
Companies are not immortal. Let's value Oculus VR as a 20-year growing annuity. Setting Facebook's cost of capital at {10%, 20%, 30%}, Oculus VR's FCF would have to grow at least {45%, 58%, 71%} a year.
Not a bad deal.
[1] https://www.cboe.com/micro/vxn/#historical
[2] https://news.ycombinator.com/item?id=7471826