Is a company really worth what it’s valued at?
An interesting article in GigaOm estimates Facebook’s 2012 purchase of Instagram as one of the decade’s best pieces of business: an operation that was initially sealed at one billion dollars, but thanks to variations in Facebook’s share price, finally closed at 715 million. Citigroup recently valued the company at no less than 35 billion dollars.
Take it as you will: whether such valuations have nothing to do with reality, and are simply based on the number of users a company has and its ability to generate advertising for each of them; at the same time is one thing, but this is a highly volatile sector within which applications can go from hot to not in a very short time. The point here is that this valuation is the conclusion reached by a company that specializes in assessing the value of companies. And if we compare it with, for example, the 1.6 billion that Google paid for YouTube in 2006, and which is now also worth 40 billion, then there is clearly money to be made here.
Instagram is a company that makes money out of advertisements that most people would say are not particularly intrusive and that would seem to be the way forward for social network advertising. YouTube is a bigger, more consolidated service with an intrusive advertising model that it seems to have been thinking about changing for some time now.
The instability created by these kinds of over-the-top valuations seems part of the landscape: after all, we live in unstable times. But the deeper message seems clear enough: just 36 months ago, a lot of people thought it absolutely insane to pay a billion dollars for a company that didn’t even have a business model. Today, that same company is deemed to be worth 40 billion dollars. What’s more, the company has done nothing particularly special since then, and Facebook, like Google with YouTube, has pretty much left Instagram to run itself. Instagram has more users than Twitter, and a valuation based on real transactions, on money that comes from many different companies that want to be seen by its many users without seeming to hassle them. And Snapchat? After rejecting Facebook’s three billion dollar offer and Google’s four billion bid, it has just been valued at around 10 billion dollars. Not bad at all.
Except as a way of attaining a rough idea, I have never been a big fan of valuations based on multipliers. At bottom, I still think a traditional valuation based on cash flow over time calculated via a percentage based mainly on the inherent risks involved in the company’s activities provides more rigorous figures. That said, the entire world seems determined to take on faith the former approach, which generates much more aggressive figures that are perfect within a speculative scenario. I was just about able to accept this until WhatsApp, which to me was a valuation too far.
In an office somewhere in Silicon Valley, a company director who at one time or another suggested an acquisition, is slapping himself on the back for the great job he did, because that company he bought for an absolutely incredible price is now worth 40 times that incredible price. Maybe it really is true that things are only worth what people are prepared to pay for them at a given moment.
Are we now about to enter a spiral whereby speculative valuations are offset by equally ethereal multipliers and lost within the inscrutable finances of corporate giants? Would Instagram really be worth those 40 billion dollars if we put it to work generating those earnings?
Is YouTube worth its valuation, given the time? What about Snapchat, which has barely begun to make any money at all? Just what is it we are talking about in reality?
(En español, aquí)
