Future Perfect


I just finished reading Future Perfect by Steven Johnson and wanted o recommend it, as well as get the salient points across in words to help me better understand the reading.

Johnson takes the reader through vignettes in history, and describes various social structures to make the point that decentralized, or distributed networks of decision-making are generally superior to what he refers to as centralized, top-down decision-making structures.

The most visual representation of the dichotomy that Johnson creates is the story of the evolution of the rail systems in France and Germany. Referred to as the Legrand Star, the French developed a rail system in the 1800’s that focused most of its traffic on main lines, all of which ran through Paris.  The entire system was designed from start to finished and was highly centralized. This made a train system that could reach very high speeds, and get people in and out of Paris from all over the country.  The Germans, on the other side of the Rhine, developed their system with no centralized design, the final product was mostly a messy network of small linkages.  When the French and Germans went to war in the late 1800’s, however, the German rail system ended up being the better solution because it was more flexible, while the French had to move all of their soldiers through Paris before getting to the front on the eastern border. Because the germans could get more troops to the line faster, they ended up winning the war.

The book has so many great, optimistic ideas about how distributed networks can make a better future. I think we’ve seen some of this at work with Kickstarter, SOPA’s defeat and a thousand amazing geopolitical events that have been amplified through social media. While some of his vision is a bit too optimistic for me, I agree that we’re at the dawn of a new way of interacting and connecting with one another.  While the growth of distributed communication platforms has amplified certain risks (the new borderless terrorist organizations, for example, thrive in distributed networks). The benefits are only beginning to become evident.

Future perfect is a great read, check it out if you have the chance.


Facebook Stock is Undervalued (or is it?)

Someone asked me to take a look at Facebook’s stock this evening, so I took a page from Aswath Damordaran’s valuations class and did a quick equity analysis, borrowing a number of his assumptions. You can download my worksheet here (Dropbox Link).

My analysis generated an implied market cap of about $48 Bn.  The stock closed today with a market cap of $41 Bn. implying that the stock is slightly undervalued by the public markets.

So is it?

I’ll let you decide, but regardless it’s a very risky stock and the future for the company is hazy due to the nature of its business (online and mobile advertising) and the newness of the media (social). The same factors that make it a game-changer generate significant risk.  To me, doing a 10-year discounted cash flow analysis on Facebook is like trying to guess what cars will look like in 50 years,  you might have an idea but so many things can happen between now and then there’s really no telling.  With that being said, it’s helpful to ground the speculation with revenue and margin estimates. A few big questions to ask related to this:

  • Is the team going to figure out mobile advertising?  Effective CPM rates on mobile (the price to advertise)  are significantly lower than desktop
  • Is corporate management and communication going to level expectations with the public markets?  The ‘story’ has much to do with tech valuations.
  • Will users get bored and go elsewhere?

I’d love any comments on the approach, or any thoughts on Facebook’s stock value.