Tumblr says Google is worth $4.2 trillion

Barron’s story about Yahoo’s acquisition of tumblr fuels fears

and reservations about Silicon Valley valuations, especially

compared to ones that are grounded in reality.

To be clear, this is not meant as a knock against Barron’s reporting.

It’s outstanding, as usual.

What’s disturbing is the $1.1 billion price Yahoo paid for tumblr,

a company that received more than $125 million in venture funding

but has only produced $13 million in revenue, Barron’s reported.

The metric used for valuating Yahoo’s price for tumblr is about 84.62

times the micro-blogging website’s annual revenue. 

While tumblr may bring a unique advantage to Yahoo, what hasn’t

been made clear in any of the reporting is whether tumblr’s

technology is so proprietary it can’t be duplicated.

Tumblr, then, in many ways, is a glimpse of how venture capitalists

value website start-ups; but this euphoria or, if you prefer, valuations

far beyond reality, cannot last.

At some point, Silicon Valley industry directors and executives will

sober up, realizing Wall Street values these start-ups for far less than

the venture capitalists searching for the next greatest fool to pay

a price that's far beyond reasonable for the company they’ve invested

in and helped build.

The tumblr acquisition shows that venture capitalists, their investors

and the start-up’s employees are the winners.  The shareholders

of the acquiring company, based on what happened to Yahoo’s

stock last week, are the losers. 

If the metrics for valuating tumblr are used with Yahoo or with the

Silicon Valley’s standard-bearer of the health of the technology

industry, Google, then these two companies are worth far more,

at least by venture capitalist standards, than Wall Street says.

For example, Yahoo, during 2012, produced about $4.9 billion

in revenue; its market capitalization is about $30 billion, which is

just over six times the company’s annual revenue, a metric far

less than what it paid for tumblr.

But if tumblr’s recent value – based on the price for which it was

just purchased – is applied to Yahoo, then Yahoo should be worth

about $422 billion. 

For that matter, Google, which produced about $50 billion in 2012,

should be worth about $4.2 trillion and yet the search engine’s market

capitalization is but a humble $290 billion, just under six times

annual revenue.

Facebook, the most recent Silicon Valley player to go public,

produced $5 billion in revenue in 2012 and has a market

capitalization of $60 billion, or 12 times revenue; applying the

tumblr valuation, the social media website should be worth $422 billion.

Based on the reality of Wall Street – around six times annual

revenue – Yahoo shouldn’t have bid more than $80 million for tumblr.

How long venture capitalists can secure the kind of valuations that

tumblr just received is hard to say.  How long Silicon Valley executives

want to be the fools of venture capitalists is also difficult to predict.

But anyone who’s ever followed valuations and traditional 

economics knows prices cannot remain this high forever.  At some

point, the rubber meets the road.

Oil, The Fed & everyone's economic future

Last month, your correspondent weighed in on oil prices, suggesting that they'll sooner determine your economic future than just about anything else. Oil prices have been falling lately and the Dow Jones Industrial Average is now above 12,000. This just in, from the London Financial Times' investment editor:

The Short View: On the Fed and oil
By John Authers, Investment Editor

Published: October 25 2006 18:13

"The Federal Reserve Open Market Committee left the Fed Funds rate unchanged at 5.25 per cent on Wednesday, and warned that 'some inflation risks remain'. The market’s response to Ben Bernanke, Fed chairman, mirrored the deathless one-liner of Mandy Rice-Davies, caught up in a notorious British scandal of the 1960s, when told Lord Astor had denied sleeping with her: 'He would, wouldn’t he?'

"The market brushed off the ritual hawkish sentence at the end of the Fed’s communique, and also gave a Rice-Davies response to Jeffrey Lacker, who for the third time dissented and voted to raise rates. The rest of the statement was doveish enough – 'inflation pressures seem likely to moderate over time' and 'the economy seems likely to expand at a moderate pace' – to convince traders that the Fed believes the economy is heading for a 'soft landing'.

"They had feared something more hawkish, so this was enough to trigger an afternoon rally. The dollar weakened, the yield on the 10-year treasury bond shed 4 basis points (making 6 basis points for the day), and US stocks showed solid gains for the day.

"But was the Fed decision really the most important market news on Wednesday? Earlier, the energy market was shocked by supply figures showing that US crude oil inventories actually fell last week. The market had expected a rise. The result was a sharp bounce in oil prices. Nymex crude futures gained 3.6 per cent to stand at $61.52 per barrel, above the $60 floor that the Opec group of oil exporters is trying to establish.

"This matters. The 'reduced impetus from energy prices' was a factor the Fed named for believing that inflation pressures would moderate over time. And there is good evidence that the current remarkable world stock rally has more to do with falling oil prices than with the Fed’s 'pause' on interest rate rises.

"Data from Tim Bond of Barclays Capital show that since the start of 2004, the negative correlation between forward price/earnings ratios on the S&P500 and spot oil prices has been 0.87. Thus, 87 per cent of falls in multiples could be explained by rising oil prices, and vice versa. And if oil keeps rising, expect equities to fall, whatever the Fed says."

So there you have it. The house expert at the Financial Times writes that there's an inverse relationship between oil prices and stock prices.

More fodder for the Democrats. Not only could they create a campaign centered around making U.S. foreign oil dependence a national security issue, but now they could also make oil prices an economic security issue for the common man.