Facebook is an amazing success as a social network. Anyone who can get 500 million people to connect, share photos, and click on little cows in Farmville deserves major kudos.
But the bullshit monopoly-money valuation merry-go-round has to stop. It’s getting beyond ridiculous and when even serious publications like Forbes jump on for a ride. It’s time to take deep breath and take a look at reality.
Minority investment valuations aren’t real
Facebook is now supposedly worth $33,000,000,000, but that number is entirely based on what star-struck minority investors have paid for a tiny slice of the company.
The company has supposedly taken just under a billion dollars in venture capital and small secondary-market sales of stock. So the actual money that has changed hands is just 3% of the total valuation of the company!
In other words, the valuation is resting on the flawed assumption that Facebook could actually ever get 33 times as much money to change hands if they wanted to. There’s just no way, no how that’s happening right now. If it could, they’d IPO tomorrow.
So the Facebook valuation based on minority investments is in my mind a complete joke in the sense that there was $33,000,000,000 dollars on the table. Irrational investor exuberance indeed.
You’re only worth something if you can make money to keep
If you boil it down to what valuations really should be about, discounted future cash flow, it gets completely bizarro-world funny. The rumor is that Facebook will be generating a billion dollars in revenue. That’s certainly real money, right?
Wrong. Real money is what’s left over after you pay your expenses. If the supposed billion dollars Facebook is allegedly pulling in this year was happening at anywhere a decent margin, they wouldn’t have needed a series E round of $120 million from Elevation Partners just three months ago.
But let’s be charitable. Let’s imagine that Facebook miraculously made $200 million this year — a 20% margin. (I don’t think that’s true, otherwise why take another $120 million from Elevation Partners, but hey, let your imagination roam). That would put Facebook’s P/E at some 165.
That’s about 7.5 times as much as Google, the golden cash cow of the internet world. Would you seriously think that Facebook is 7.5 times as good or as promising a business as Google? Get outta here.
No outrageous profits after seven years and half a billion users
Oh, well, but maybe Facebook just needs to mature, you say. If we give them just a few more years, the profit fairy might drop by and sprinkle her billions all over Facebook and its shareholders. I call fat chance.
Facebook has been around for seven years. It has 500 million users. If you can’t figure out how to make money off half a billion people in seven years, I’m going to go out on a limb and say you’re unlikely to ever do.
Now this was all fun and games until somebody promised the Newark schools $100 million in stock based on the fantasy valuation of his under-profiting company. But now it’s real. They’re selling the skin before they shot the bear or peeing their pants to get to the hut or whatever you want to call it. It’s just not good, alright?