Fácébook: How Overvalued is It?·

[Virgil Showlion]

...a question that I've long been asking myself.

Most of you will have heard by now about Goldman's groundbreaking deal with the fledgling social network.

Like Google--only to a greater extent--Facebook's business model isn't sterling on the revenues end. Hutchison at the SBC points this out rather eloquently in a recent article silverbearcafe.com/private/01.11/toxic.html:

Goldman Sachs' $2 billion deal for Facebook, valuing the social networking site at $50 billion, combines the worst elements of the 1997-2000 and 2004-07 bubbles. It sets a grossly excessive valuation on an Internet company with modest revenues and prospects. It also involves an investment bank structuring a complex deal to maximize its own fees, while driving a truck through two major elements of financial services regulation. Add a third element, that it places a company controlling personal information on 500 million users in close business partnership with a Russian billionaire with a criminal record and you can see the deal is truly groundbreaking. It should also raise important red flags about current market conditions.

General market opinion is that the U.S. stock market is not currently overvalued, because it has not broken through its 2007 highs. I would argue that U.S. fiscal and monetary policies are unsustainable, making the foundations of the economy far more fragile than in 2007. In any case, the Facebook deal in terms of valuation is reminiscent not merely of 2007 but of 1999. However good a company's prospects a valuation of 30 times revenues is excessive. After all, there is not much more for Facebook to go for in terms of recruiting new members; with 500 million it already has 7% of the world's population and well over half the global population of young affluents that advertisers drool over.

If with this customer base and a fashion-level second to none Facebook can't gross more than measly $2 billion, with net income not much above break-even, its business model is not worth anything like $50 billion. At this level it is at best JDS Uniphase, destined for painful post-bubble deflation. More likely it is Pets.com, destined to disappear in a puff of smoke when the market turns down, leaving only a sock puppet behind.

Again, for the copy-and-paste impaired, the bolded portion captures the crux of my concern.

[rovo]

Virgil, How about posting something about what the "deal" is. I don't know anything about the deal as they are not a public company.

[Virgil Showlion]

Rovo, the articles I first read about it are here: www.msnbc.msn.com/id/40885536/ns/business-us_business/ and here: www.businessweek.com/technology/content/jan2011/tc2011013_185170.htm.

Hutchison's article does a decent job of explaining what the shady elements (what he calls "driving a truck through two major elements of financial services regulation") are. In essence, they're bringing on muy new investors without any of the burdensome disclosure rules that come with an IPO.

[The Virginian]

valuing the social networking site at $50 billion

In my opinion - It's about 49 billion over valued!

[Virgil Showlion]

In my opinion - It's about 49 billion over valued!

Remember that Google was valued at $90 at one time.

[ihearyou2]

Read this which is a bit mushy but internet companies typically are...

www.simplyzesty.com/facebook/working-facebook-fan/

[kman]

Reverse equity.....How does this benefit Goldman....What has to happen for Goldman to get fat?

[kman]

Ipo's always make me nervous....They tend to get shorted

[Aman A.K.A. Ahamburger]

Nice!

[kman]

Facebook...trend..or fad?

[Aman A.K.A. Ahamburger]

Zuck got person of the year! He's pulled of a clean socail networking site(some thought this impossible).. It's looking like he might pull this off. The sheer volume and demographinc of people says a lot. Something that has never been done.

[usaone]

Facebook=Trend ;D ;D ;D

As FTI would say....There not overvalued....until they are!!

[The Virginian]

Seriously - What does Facebook have to sell besides advertising?

At least Google has the whole Internet as a client. I know there is potential on Facebook but 50 Billion in potential? Give me a break!

[usaone]

Facebook will kill Google.....evenrually.

My opinion.

[usaone]

Eventually. ;D ;D ;D

Cant spell today. ;D

[The Virginian]

Facebook will kill Google

How? Google has too many revenue sources. What does facebook have besides that snotty nosed brat kid? ;D

[verrip1]

I guess one needs to decide if he/she wants to consider book value, projected future cash flow growth value, or dream value.

[Deleted]

How Overvalued is It?

I really have no idea. The problem with something like face book is that it is so hard to value. It really depends on how creative they are at ways to raise money. I have heard that by their rules they can sell your info to companies (which is why I'm not on there - plus of course I don't want to talk to most people so why make it easy for them to contact me).
What they are able to do is (I'm sure) break down everyone's data for advertizers & target the population. That is worth a lot to some companies I guess.

[comokate]

Facebook could go the way of Myspace...social media "fun", but is it really anything more than a "flavor of the moment" ?
When you look at what innovations Google is actually attempting, like "Google Chrome" and it's potential applications..hmmmm...I'm thinking Google has a lot more substance-

[kman]

..fad or trend..I lean towards fad...Google has some tough minded business people...and a supporting staff..that is unmatched.

[The Virginian]

By Athima Chansanchai



Fore the most part, Goldman Sachs' recent $500 million investment in Facebook, a move that boosted the social networking entity to a value of $50 billion, has been seen as a positive development, a supreme vote of confidence in the staying power of an application that crosses generations, ethnicities, gender, etc. and appeals on a broad level as well as for those using it in a more niche capacity.

The financial buzz around the site has it already surpassing the 600 million user mark, according to Bloomberg, which reported the number from a super secret 100-page document being circulated amongst Goldman Sachs investors. Facebook stats crunchers Socialbakers also chimed in on the 600 million milestone, which has occurred six months after the company hit 500 million. The US of A led the way with 20.7 million users.

The Wall Street Journal also reported evidence that Facebook would be going public by April 2012.

But for every bullish perspective on Facebook, there are the apocalyptic naysayers that think this investment by Goldman Sachs will be as good as it gets for Facebook, and that this is the beginning of its end.

In the MSNBC-TV video above, "Media Theorist" and author Douglas Rushkoff compares this pivotal point in the company's history to the AOL/Time Warner merger and how after all the hype, this may very harken that the end is nigh for Mark Zuckerberg's vision, despite the interviewer's idea that he'd be "too genius to let Facebook die."

After all, Rushkoff says, it's just a "social networking application," a "social company" like a nightclub, so how could it really make a go of it as a company in the long run?

[usaone]

Facebook is catching up quickly. Would be surprised to see facebook merge with Google one day.

[The Virginian]

It's just not my kind of thing so I'll pass on the IPO. Could be the biggest IPO of the decade though, who knows...just not for me.

I think I will pass also. Unless they can show me how it is worth 50 billion I not buying into the hype! Goggle has multiple advertising platforms and the whole Internet world to sell to. Facebook while large still has a limited audience. I don't deny their audience is large enough to make substantial money - just not large enough to compete with Google. Look what happen to Myspace - It practically dried up over night - The Internet is still growing and it doesn't take much for people to jump from one Fad to the next - This is especially true when they have paid nothing for it and have nothing to lose. No contracts or financial commitments.

[itstippy]

I don't use Facebook but I've played with it and understand what it does. It's very cool; as ratchets says it's a good way for folks to stay in touch. I don't see how it can generate much revenue, though. It's nothing more than friends and family, and friends of friends of family, sharing cute puppy pics and Christmas cookie recipes. Big deal. Data showing who's sharing photos of Jr's graduation party isn't valuable. Goldman smells a chance to make an IPO killing, that's all. People will buy Facebook stock because it's cool, and they use it, and their friends use it, and their kids use it. It's wildly popular, so it must be a great investment. Huh. Until Facebook starts charging a fee to join they'll have to rely on banner ads for revenue. We're back to placing a value on "eyeballs". Cripes.

Google, on the other hand, is a gold mine. People use it to find information and to locate products to buy. If you own the algorithms that drive the most popular search engine in the world you can make HUGE revenue. How much is it worth to have your product pop up when someone searches under "Best New Car 2011", or to have positive (or negative) articles on top of the list when someone searches "Obama" or "Palin"?

Wikipedia also has huge revenue potential if they ever choose to capitalize on it. Facebook, not so much.

[Jake 48]

I don't have Facebook and don't see myself ever having it. Too many problems with stuff being posted and used against you, people will never learn. DW and kids have it, just a waste of time

[itstippy]

I just saw an ad on TV for Carnival Cruise Lines, and they ended by inviting folks to visit their Facebook page. This is a new wrinkle for me. Does Facebook charge companies to open Facebook pages? Is this a source of revenue?

Why would Carnival want a Facebook page instead of (or in addition to) a .com web page? What's different about a Facebook page? Do Carnival customers share pictures and text about their Carnival experiences with other Carnival customers?

How "fun" is that?

[The Virginian]

Does Facebook charge companies to open Facebook pages? Is this a source of revenue?

No it's free, That's just it the only way they can make money is by selling ads - valuable yes - millions? maybe; Billions ? I really don't see it!

[itstippy]

Neither do I. Some do, though:
dealbook.nytimes.com/2011/01/24/how-facebook-could-reach-125-billion/?ref=business

[dancinmama]

Jan 15, 2011 20:26:24 GMT -5 @itstippy said:

I don't use Facebook but I've played with it and understand what it does. It's very cool; as ratchets says it's a good way for folks to stay in touch.

I thought that email did that quite well before Facebook came along.

[dancinmama]

Jan 23, 2011 19:53:18 GMT -5 @itstippy said:

I just saw an ad on TV for Carnival Cruise Lines, and they ended by inviting folks to visit their Facebook page. This is a new wrinkle for me. Does Facebook charge companies to open Facebook pages? Is this a source of revenue?

Why would Carnival want a Facebook page instead of (or in addition to) a .com web page? What's different about a Facebook page? Do Carnival customers share pictures and text about their Carnival experiences with other Carnival customers?

How "fun" is that?

This is the ONLY reason that I have a Facebook account. I am a couponer and companies will give you some pretty great coupons if you LIKE them on Facebook. My account isn't even in my real name so no one could "find me" on Facebook if they wanted to.

DH has an account to keep in touch with some of our old college friends, but he doesn't check out his page or whatever it is very often. He wants to stay connected so some of them, but not too connected if ya know what I mean.