The Goldman Sachs led investment of $500m in Facebook, its valuation of the company at $50bn and the news that 22 more companies are in the technology IPO pipeline this year will have given many people a feeling of deja vu. We remember the dotcom boom when we were told that old business models were being turned on their heads and that we should pile our money into companies even though they had no sign of a secure revenue stream. Anyone who questioned this was a square who just didn’t get it, daddio.
To many of us, the Facebook valuation is bewildering. Most of us don’t pay anything for Facebook, LinkedIn or Skype. We find it hard enough to remember last time we clicked onto a Google ad, let alone one anywhere else. Are we being asked, once again, to invest in snake-oil?
Brett Arends of Market Watch is no fan of Facebook but he reckons that the $50bn valuation may be about right:
Even if Facebook didn’t add a single extra subscriber from here, a $50 billion market value would work out at $100 per user.
Is that too much? Think about all the data Facebook has about you, what you do and what you like. Think how much stuff its advertisers can sell you.
To earn a 20% return on $50 billion, without any growth in subscriber base or traffic, investors would need Facebook to make $10 billion in net income per year. That’s just $20 per user per year. It’s 7.1 cents for each hour one of them spends on the site.
In other words, the sheer volume of users and the amount of data the company has about them could enable Facebook to offer targetted advertising and marketing on a huge scale – a relatively cheap way for businesses to reach customers.
He may well be right, of course, but I’m still sceptical. As Tim Worstall pointed out in November, Facebook has told us it is finally getting some decent revenue in but we have no idea about anything else, like its operating costs, for example. He warns:
[I]n a market economy something is worth what people are willing to pay for it in that market.
Then again, we’ve seen that such market valuations are – how shall we put this – variable. One day the mortgage bonds of America were worth one amount, seemingly the next day $7trn less.
From Geocities to Yahoo via AOL, that’s not an encouraging picture for immediate valuations lasting into the long term. Perhaps social media has more stickiness, more ability to keep the punters? There is, after all, a network effect; once you’ve linked up with all your buddies, moving has a cost.
But then Bebo, Myspace and Friends Reunited don’t seem to have shown that to be true. It’s almost as if social media works like the stock market does: by the time everyone’s talking about shares, you should be selling. By the time everyone’s on a site then all the cool kids will leave: like a nightclub, in fact?
[I]t’s best understood as an options price: there’s a big downside in that it may be worth nothing as someone comes up with some new and different social media, as Facebook similarly shat on its predecessors.
I wouldn’t buy stock if I could and I wouldn’t short it if that were possible. For there’s one more thing about stock valuations to keep in mind: they’re like poker. There’s a mark at every table and if you don’t know who the mark is, it’s you.
Realising this is the best way to avoid losing at poker by leaving the table: with Facebook, everyone else in the market gets to read the accounts and we don’t. Here, we’re all marks.
My gut feel is with Tim Worstall rather than Brett Arends. Facebook still feels to me like a trend. A few years ago everyone was talking about Friends Reunited; now they’ve all migrated to Facebook and they could go somewhere else just as quickly. I may be wrong but, when the IPO comes around, my money will be staying in my pocket.