Monday, January 3, 2011

Is Facebook worth $50 billion - or more?

You probably saw in this morning's papers that Goldman Sachs (along with a Russian partner) are using a "special purpose vehicle" which allows it to skirt SEC regulations and investing $500 million in Facebook. According to the piece in the New York Times, this now values Facebook at $50 billion:

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction.

The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.

But buried later in the article is the following:

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

http://dealbook.nytimes.com/2011/01/02/goldman-invests-in-facebook-at-50-billion-valuation/?hp

So let's think about this: Facebook is barely profitable, and could perhaps generate $2 billion in revenue. Goldman's clients (again, please note that Goldman itself is not investing in Facebook - it only doing so on behalf of its well-heeled customers) are paying 25x revenue for a barely profitable company.

Then there's more. Facebook is still a private company, and apparently has no plans to go public any time soon (although news reports indicate that it is a possibility in 2012). Usually companies in the private market trade at a discount to publicly traded companies simply because they are less liquid.

If we assume a fairly typical 25% private market discount for Facebook, this would imply that Goldman analysis indicates that a publicly-traded Facebook would be worth around $75 billion.

Now, I know what the response to my incredulity will be: I just don't get it. My critics might say:

Facebook represents the future of internet. Not only are there more than 500 million Facebook members, but once Facebook adds such capabilities as email and search to its functions, it will become the most important space on the internet.

Well, maybe I am missing the point, but perhaps there is something else going on: Valuations of internet companies are once again reaching irrational exuberance stages.

Facebook is a company with tremendous potential, and CEO Mark Zuckerberg deserves a huge amount of credit. However, I think you have to assume a huge increase in revenues starting soon in order to justify today's valuations.

Moreover, while Facebook's community is unparalleled, it does have some pretty formidable competitors like Google that are trying to keep their own market share.