DCFs don’t work for Facebook

Discounted cash flow thinking can’t possibly work with Facebook-like companies.

Reasons

  • Facebook’s growth rate doesn’t go well with the discount rate
  • Facebook’s uncertainty is high. It’s competing for a slice of time against other internet companies. Anyone has a chance to make a dent in the overall usage of FB’s users.

Smart investors are’t trading based on Facebook’s cashflows. They’re trading based on 2nd degree metrics, such as eyeballs, monthly active users, and time spent.

There needs to be a new set of formulae to determine the intrinsic value of high growth internet companies.

As of now, it’s a very abstract one: the more engaged users are with an internet company that doesn’t trade using fundamental business principles, the higher the valuation.

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