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The Brode Report  |  March 2012

David Brode profile  

March has been one of my busiest months on record. I’m very excited about the work I’ve been doing and just hope it all keeps rolling in. We basically skipped winter in Colorado this year, and my feeling is that if we can’t have winter, we may as well have summer. Welcome to Spring, everyone!

All the best,



I love working through complex corporate finance analyses; I'd be happy to leverage the
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I’m giving in to popular demand and exploring Facebook’s valuation. One market watcher sent me a story that compared Facebook to McDonalds, since each has a valuation of approximately $100B. That story was negative on FB, saying:

[McDonalds] has over 26,000 franchise operations and over 6,000 company stores employing about 1.7M people worldwide, selling $24Bn worth of food a year with a $5Bn net profit. Facebook has 3,200 people but it generates $1.2M in revenues per employee ($3.8Bn) and drops $1Bn to the bottom line. Facebook’s assets are mainly IP and those are about as valuable as MySpace’s assets now that people have lost interest. McDonald’s has $30Bn of cash, plants, equipment and real estate and only $2.5Bn of “Goodwill,” which includes its brand name.

McDo vs FBIn the end, the article felt that McDonalds had more value because it makes $1 per customer visit versus Facebook, which makes more like $0.50 per user. Think of it this way:

Facebook has ~1B users and makes ~$1B per year, or $1 per user, but that’s “only” 0.3 cents per user per day. By contrast, McDonalds serves 10B people per year and has $5B in net income, so that’s $0.50 per customer visit.

Seems to me this is a flawed argument to hang Facebook on. FB sells our data every single day, and nets $1/user/year out of it. McDonalds may make $0.50 every time a customer comes in, but people don’t do that every day. I think Morgan Spurlock proved that in Super Size Me.

But from a market perspective, I think the math might work this way: if MCD can get a $100B valuation on $5B in NI, that’s a 20x P/E. (The actual number is 18.5x right now.) So all Facebook needs to do to deserve the $100B valuation is to get $5B in net income—just five times what they have now. While achieving 5x profitability is no small task, my intuition is that Facebook has just begun to fight and will find a way to make money from their unique position. Facebook knows so much about so many people that it’s hard for me to estimate what that will be worth. If it is worth $1 today, I do believe it’s possible for Zuckerberg to find a way to get $5 for that in short order.

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A Penny Saved….

“Really?” My 13-year-old daughter Emma was indignant when the clerk at the coffee shop returned $3.20 in change after I gave him a ten dollar bill for a $6.78 tab. (For those of you not wanting to turn on the math chip yet, the correct change was $3.22.) That’s right, he shorted me two pennies. I didn’t think much about this, but then over the next three days the same thing happened twice more. The message seems to be that a penny is worth so little that the clerks don’t feel like they’re cheating me, it’s just so inconsequential that they don’t bother. For years, merchants have been rounding the pennies away in our favor and we’ve been feeding or grabbing from loose pennies by the register just so we didn’t get four cents back. But this feels like a new level—just taking it without asking. It makes me wonder if we’re getting closer to giving up pennies altogether.

Wikipedia reports the cost of making a penny to be 1.79 cents in 2010 in one article and 2.4 cents as of February, 2012 in another. I’ll just say that if we eliminate the penny, we eliminate clerks not giving pennies due back.

Penny (United States Coin)
Penny Debate in the United States


Groupon… Google is looking better and better

Readers of this space know that I was skeptical when GRPN thought a year ago that they could command a $30B valuation. The stock debuted at $26 (over $16B valuation). In the months since IPO, the NASDAQ is up over 13% and GRPN is down over 30%. While GRPN is still valued at over $11B, the insiders are still under lockup. I wonder if the price will stick or if they will regret turning down Google’s $6.6B in 2010. One more bad quarter could cause the price to tank.

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