Skip to main content

Main menu

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JPM
    • Awards
    • Editorial Board
    • Published Ahead of Print (PAP)
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

User menu

  • Sample our Content
  • Request a Demo
  • Log in

Search

  • ADVANCED SEARCH: Discover more content by journal, author or time frame
The Journal of Portfolio Management
  • IPR Logo
  • About Us
  • Journals
  • Publish
  • Advertise
  • Videos
  • Webinars
  • More
    • Awards
    • Article Licensing
    • Academic Use
  • Sample our Content
  • Request a Demo
  • Log in
The Journal of Portfolio Management

The Journal of Portfolio Management

ADVANCED SEARCH: Discover more content by journal, author or time frame

  • Home
  • Current Issue
  • Past Issues
  • Videos
  • Submit an article
  • More
    • About JPM
    • Awards
    • Editorial Board
    • Published Ahead of Print (PAP)
  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

Quis Pendit Ipsa Pretia: Facebook Valuation and Diagnostic of a Bubble Based on Nonlinear Demographic Dynamics

Peter Cauwels and Didier Sornette
The Journal of Portfolio Management Winter 2012, 38 (2) 56-66; DOI: https://doi.org/10.3905/jpm.2012.38.2.056
Peter Cauwels
is a senior researcher for the Chair of Entrepreneurial Risks at ETH Zurich in Zurich, Switzerland.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: pcauwels@ethz.ch
Didier Sornette
is a professor, holding the Chair of Entrepreneurial Risks at ETH Zurich in Zurich, Switzerland, and a member of the Swiss Finance Institute in Geneva, Switzerland.
  • Find this author on Google Scholar
  • Find this author on PubMed
  • Search for this author on this site
  • For correspondence: dsornette@ethz.ch
  • Article
  • Info & Metrics
  • PDF (Subscribers Only)
Loading

Click to login and read the full article.

Don’t have access? Click here to request a demo 
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
EMEA: +44 0207 139 1600

Abstract

Cauwels and Sornette present a novel methodology to determine the fundamental value of firms in the social networking sector, motivated by recent realized IPOs and by reports that suggest sky-high valuations of firms such as Facebook, Groupon, LinkedIn Corp., Pandora Media, Inc., Twitter, and Zynga. The authors’ valuation of these firms is based on two assumptions:1) revenues and profits of a social networking firm are inherently linked to its user base through a direct channel that has no equivalent in other sectors, and 2) the growth in the number of users can be calibrated with standard logistic growth models, which allows for reliable extrapolations of the size of the business at long time horizons. Cauwels and Sornette illustrate the methodology with a detailed analysis of Facebook, one of the biggest of the social media giants. A clear signature of a change of regime, occurring in 2010 in the growth of the number of users, is observed. The change of regime is a move from a pure exponential behavior (a paradigm for unlimited growth) to a logistic function with asymptotic plateau (a paradigm for growth in competition). The authors consider three different scenarios: a base case, high-growth, and extreme-growth scenario. Using a discount factor of 5%, a profit margin of 29% and $3.50 of revenues per user per year yields a value of Facebook of $15.3 billion in the base case scenario, $20.2 billion in the high-growth scenario, and $32.9 billion in the extreme-growth scenario. According to the authors’ methodology, this implies that Facebook needs to increase its profit per user before the IPO by a factor of 3 to 6 in the base case scenario, 2.5 to 5 in the high-growth scenario, and 1.5 to 3 in the extreme-growth scenario in order to meet the current, widespread high expectations. To prove the wider applicability of their methodology, the analysis is repeated for Groupon, the well-known deal-of-the-day website, that went public in November 2011.The results are in line with the Facebook analysis. Customer growth will plateau. By not taking this fundamental property of the growth process into consideration, estimates of the Facebook IPO are wildly overpriced.

TOPICS: Legal/regulatory/public policy, accounting and ratio analysis, statistical methods

  • © 2012 Pageant Media Ltd
View Full Text

Don’t have access? Click here to request a demo

Alternatively, Call a member of the team to discuss membership options

US and Overseas: +1 646-931-9045

UK: 0207 139 1600

Log in using your username and password

Forgot your user name or password?
PreviousNext
Back to top

Explore our content to discover more relevant research

  • By topic
  • Across journals
  • From the experts
  • Monthly highlights
  • Special collections

In this issue

The Journal of Portfolio Management: 38 (2)
The Journal of Portfolio Management
Vol. 38, Issue 2
Winter 2012
  • Table of Contents
  • Index by author
Print
Download PDF
Article Alerts
Sign In to Email Alerts with your Email Address
Email Article

Thank you for your interest in spreading the word on The Journal of Portfolio Management.

NOTE: We only request your email address so that the person you are recommending the page to knows that you wanted them to see it, and that it is not junk mail. We do not capture any email address.

Enter multiple addresses on separate lines or separate them with commas.
Quis Pendit Ipsa Pretia: Facebook Valuation and Diagnostic of a Bubble Based on Nonlinear Demographic Dynamics
(Your Name) has sent you a message from The Journal of Portfolio Management
(Your Name) thought you would like to see the The Journal of Portfolio Management web site.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Citation Tools
Quis Pendit Ipsa Pretia: Facebook Valuation and Diagnostic of a Bubble Based on Nonlinear Demographic Dynamics
Peter Cauwels, Didier Sornette
The Journal of Portfolio Management Jan 2012, 38 (2) 56-66; DOI: 10.3905/jpm.2012.38.2.056

Citation Manager Formats

  • BibTeX
  • Bookends
  • EasyBib
  • EndNote (tagged)
  • EndNote 8 (xml)
  • Medlars
  • Mendeley
  • Papers
  • RefWorks Tagged
  • Ref Manager
  • RIS
  • Zotero
Save To My Folders
Share
Quis Pendit Ipsa Pretia: Facebook Valuation and Diagnostic of a Bubble Based on Nonlinear Demographic Dynamics
Peter Cauwels, Didier Sornette
The Journal of Portfolio Management Jan 2012, 38 (2) 56-66; DOI: 10.3905/jpm.2012.38.2.056
del.icio.us logo Digg logo Reddit logo Twitter logo Facebook logo Google logo LinkedIn logo Mendeley logo
Tweet Widget Facebook Like LinkedIn logo

Jump to section

  • Article
    • Abstract
    • FACEBOOK’S USERS
    • EXPONENTIAL GROWTH VERSUS GROWTH IN COMPETITION
    • THE LOGISTIC GROWTH MODEL AND ITS CALIBRATION
    • FULL CALIBRATION OF THE LOGISTIC EQUATION AND THE THREE GROWTH SCENARIOS
    • THE VALUATION OF FACEBOOK
    • THE VALUATION OF GROUPON
    • CONCLUSION
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

Similar Articles

Cited By...

  • The Volatility Effect Revisited
  • Clash of the Titans: Factor Portfolios versus Alternative Weighting Schemes
  • Oasis or Mirage: Assessing Low-Risk Investing from a Global Perspective
  • The Risk Parity Principle Applied to a Corporate Bond Index
  • Factor Exposure of Alternative Beta Strategies * across Market Regimes
  • A Taxonomy of Beta Based on Investment Outcomes
  • Implied Expected Returns and the Choice of a Mean-Variance Efficient Portfolio Proxy
  • The Resale Value of Risk-Parity Equity Portfolios
  • Low-Risk Anomalies in Global Fixed Income: Evidence from Major Broad Markets
  • Risk Parity, Maximum Diversification, * and Minimum Variance: An Analytic Perspective
  • Choose Your Betas: Benchmarking Alternative * Equity Index Strategies
  • Google Scholar
LONDON
One London Wall, London, EC2Y 5EA
United Kingdom
+44 207 139 1600
 
NEW YORK
41 Madison Avenue, New York, NY 10010
USA
+1 646 931 9045
pm-research@pageantmedia.com
 

Stay Connected

  • Follow IIJ on LinkedIn
  • Follow IIJ on Twitter

MORE FROM PMR

  • News
  • Awards
  • Investment Guides
  • Videos
  • About PMR

INFORMATION FOR

  • Academics
  • Agents
  • Authors
  • Content Usage Terms

GET INVOLVED

  • Advertise
  • Publish
  • Article Licensing
  • Contact Us
  • Subscribe Now
  • Sign In
  • Update your profile
  • Give us your feedback

© 2022 Pageant Media Ltd | All Rights Reserved | ISSN: 0095-4918 | E-ISSN: 2168-8656

  • Site Map
  • Terms & Conditions
  • Privacy Policy
  • Cookies