Is Facebook’s $75 Billion valuation getting out of hand?

By: ispeculatornew
Date posted: 03.09.2011 (5:00 am) | Write a Comment  (10 Comments)

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It’s amazing isn’t it? I received an email this weekend telling me that Facebook’s valuation was now up to $75 billion as it continues to race towards $100 billion and what will certainly turn out to be the most anticipated IPO in a very long time. Just 9 months ago, I had discussed the choice between owning 1/5 of Google or Facebook. Guess what… the question is now, do you prefer owning Facebook or 1/3 of Google? It certainly becomes a major challenge to price Facebook at this point for many different reasons. Some have been wondering about a new dot com crash but I personally have been very very bullish about Facebook and had said it was still a bargain when priced at $50 billion. Is it still now? Here are the main challenges that I see in pricing Facebook at this point:

Private Financials: Apart from a select few, no one has access to the Facebook financial statements. Sure, there are revenue and profit estimates all over the place but valuing from those becomes a major challenge

Unknown leadership: In Google’s early days, many investors had their doubts about Page & Brin managing the whole operating and bringing in Eric Schmidt turned out to be a confidence booster for investors. While many including myself do not think Mark Zuckerberg is a vilain, many still question his abilities to manage a $100 billion company.

Vulnerabilities: Facebook is part of this new breed of companies that must be very careful in every move in an effort to not have its users turn against it and security is also critical in keeping the users trust. How much downside risk does this present?

The new internet: The web is turning out more social and Google is one company who is worried about being left behind. Facebook is certainly the very core of this new internet but it’s not clear how it will be shaped 10 years from now and how that will impact Facebook.

Where are the revenues?

Of course, the major point is that Facebook is such a young company and a new business model that it is a major challenge to figure what the company will look like a few years from now. Even trickier is figuring out what kind of revenues and profits will be possible down the line in 5 to 10 years. There are a million different possibilities and I think it’s fair to say that revenues estimates could easily vary from a few hundred millions per year to several billions and possibly the biggest tech company in the world. But how can you compare Facebook to a company like Apple? It’s a challenge. I had discussed some of my ideas if I were Facebook’s CEO for a year. Here are the sources of revenues that we anticipate:

Display advertising: Facebook si already doing a decent job with advertising but that will certainly grow over time as local businesses understand how to make it work.

Search advertising/licencing: Over time, Facebook is gathering a lot of data that makes it more likely that its search will be able to compete. As well, it has made deals with Microsoft and others to provide data t a cost.

Giant store: I think Facebook will soon be able to help merchants by hosting their stores and making it much easier for consumers to “buy online” and of course that will be done

Taxing applications: As Apple does through the Itunes store, Facebook has started doing on its own. Applications and games that use Facebook to make it “social”  are now paying a tax, on all sales of apps, virtual goods or anything else. Companies like Zynga have been working almost exclusively through Facebook

So overall?

I can see how some might think that Facebook is worth too much at this point to be a deal and to be fair, since so many estimates are involved, I would have a hard time convincing anyone otherwise. But personally, I would still be buyer of Facebook well beyond the current prices…. How about you?

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10 Comments

  1. […] Speculator presents Is Facebook’s $75 Billion valuation getting out of hand? posted at Intelligent Speculator, saying, “How much do you think Facebook is […]

  2. Comment by Bret @ Hope to Prosper — March 14, 2011 @ 3:10 pm

    If Facebook’s ad revenue tops $4B in 2011, then a $75B valuation is reasonable. That put’s the stock’s value at a 18.5 P/E ratio. That isn’t bad for a growing tech company that dominates it’s market segment.

    However, I won’t be investing in the IPO, because I believe it’s dominance may be short-lived. Everyone knows what happened to Friendster and MySpace and it happened quickly. Also, FB has a bad habit of playing loose with privacy, which may alienate users or draw the scruntiny of regulators.

  3. Comment by IS — March 14, 2011 @ 7:09 pm

    @ Bret – Well that would assume that they had a 100% profit margin though:) As for MySpace and Friendster, they are completely different in my opinion because they were managed with short term goals and profits in mind.

  4. Comment by Bret @ Hope to Prosper — March 15, 2011 @ 10:10 am

    IS,

    Thanks for setting me straight. There is a big difference between revenue and earnings. And, you are right about them being overvalued.

    I still think the second issue is their longevity. As Warren Buffett would say, they don’t have a very big moat. It’s not like they have factories, patents or mineral rights.

    Yes, they have a lot of users. But, anyone could put up a new website and be the next big thing. Users can switch instantly and be lost forever.

  5. Comment by IS — March 15, 2011 @ 10:20 am

    @Bret – I do agree with you but also think that overall, the value is still there and Facebook is a terrific investment. Is it risky to some extent? Yes. But I think it’s worth the risk right now.

  6. Comment by JMan Invests with Aurora Bank — March 15, 2011 @ 2:55 pm

    I agree with you, Facebook has a very strong presence on the internet and its so difficult to estimate how much its actually worth. Looking at the ad revenue numbers, it looks like a big chunck of the value of Facebook lies on the brand. I would definitely buy a portion of Facebook, if I had a few millions to spare 😉 thanks for sharing!

  7. Comment by thomas — March 17, 2011 @ 10:59 pm

    How can small invest investing these internert company

  8. Comment by IS — March 21, 2011 @ 8:14 pm

    @Thomas – Right now? Probably better too simply wait a few months unfortunately.

  9. Comment by IS — March 28, 2011 @ 6:28 pm

    @JMan – Why only if you had a few millions?

  10. […] will keep it up. In the tech world, it’s difficult to find two more extreme examples than Facebook and Research in Motion (RIMM). Last year, I had written about “catching a falling […]

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