Facebook Lunacy

CNN's top story Monday read: Facebook Now Worth $50 Billion. Next to the headline was a portrait of Facebook CEO Mark Zuckerberg.

"I wonder what it's like to be Zuckerberg," I asked one of my Foolish colleagues. "Wake up in the morning. Check the day's top news stories. First item on the list: Me. I'm loaded."

Then it hit me. Is this really a big deal? A company has a $50 billion market cap and it's breaking news?

Forty-nine S&P 500 companies have a market cap north of $50 billion. Do we drool over them? No. CNN will never run a top story that says Breaking News: Occidental Petroleum Now Worth $79 billion. But it is.

So why are we so obsessed with Facebook's valuation?

One, it's a young company started by college dropouts. Zuckerberg -- Time's person of the year -- is 26, looks 16, and judging by his public appearances has the social skills of a soccer ball (ironic, given his line of work). With a $50 billion valuation and estimates that he owns a quarter of the company, Zuckerberg is worth about $12.5 billion. Facebook started seven years ago. Do the math: He's earned about $3,400 per minute of Facebook's existence. Newsworthy? Oh yes. I'm fascinated.

But maybe there's another reason we're so crazed about Facebook's valuation.

It's lunacy.

If we're talking online media companies, Google (Nasdaq: GOOG  ) was also worth $50 billion in 2005. The difference? In 2005, Google had net income of $1.5 billion. Most sources say Facebook has revenue of about $1.5 billion. In other words, investors are valuing Facebook at a price-to-sales ratio similar to the price-to-earnings ratio of a young Google. I'm obviously not the first to shake my head at this. "I'm no Benjamin Graham, but even I can see that shares of Facebook today are trading for, ohhh, about 50 times sales and at least 1,000 times earnings," wrote my colleague Nick Kapur last week.

And face it. What little we know about this company's finances doesn't make one terribly enthusiastic. Facebook's home page contains 20 words, six of which are, "It's free, and always will be." Assuming it's somewhat accurate, the movie The Social Network portrays Zuckerberg as being mostly against monetizing the site at all. He wanted a great company, which he obviously distinguished from a profitable company.

Back in the real world, Zuckerberg remarked in 2004 that "we're definitely not in it for the money." Granted, that seems to be the key behind Facebook's popularity: It focuses relentlessly on the quality of its product, end of story. That's admirable, and keeps users coming back day after day. But product success and financial success are two very different things. Investing in a company whose CEO seems indifferent to financial success doesn't strike me as appealing.

I think it boils down to this. Those investing in Facebook aren't doing so because they think shares are cheap. They're doing it either for ancillary benefits -- Microsoft's (Nasdaq: MSFT  ) 2007 investment that provided exclusive advertising privileges, or Goldman Sachs' (NYSE: GS  ) recent backing that could give the bank first dibs for underwriting a Facebook IPO -- or for the greater fool theory that public investors will become so captivated by Facebook's large numbers (750 million pictures uploaded over New Year's weekend!) that we'll look past its relative financial shortcomings once it IPOs.

Maybe I'm wrong. There's no public information on Facebook's financials after all. Those who have invested in the company at a $50 billion valuation know much more than I do. But we've seen this play before. Become obsessed with an inspiring and popular company, forget about finances, and bid valuations to the moon. It never ends well.

Fool contributor Morgan Housel owns shares of Microsoft, and has been a happy Facebook member since 2005. Google and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2011, at 12:46 PM, medicalquack wrote:

    You are correct, it is insanity. Is there much being tangible here? It's a conglomerate of algorithms, those make go around too so in essence Goldman invested in what they know best, the power of mathematical formulas too, as when you look at Facebook, look at the addiction rate.

    This fact keeps the wolves away from their doors with questions and investigations. Tony Blair last year kind of said this very well last year when in an interview he said "I no idea the banks were to interconnected" and that goes for many in the US today with IT Illiteracy and knowing how system work. It's a big problem and those with the best algorithms get the money.

    It's funny the GOP had no interest until this week with Facebook and now you see a live broadcast on there plus the insanity of reading our Constitution out loud, right out of the 70s mentality there as everyone else uses pod casts today. The 2 page bill repeal for healthcare will even scare you more, 2 pages that has no comprehension on what the cost is to reset all the IT infrastructure to repeal it. Again, the 70s seem to be alive and well here. It's sad because it makes them look bad and maybe not so smart sometimes.

    They need impartial Algo Men so again when you look at all the behavioral analytics out there today a bank as smart as Goldman I feel would not overlook some of these areas too as that's what everyone wants a predictive and behavioral process as that means control and money. You can read more here and see the sad 2 page bill someone mustered. Indeed these are scary times with the lack of IT literacy needed to make laws today and how that leads to those in the know being able to influence and control the IT illiterate. It has been going on for years but with transparency and others getting educated today, you can't miss the big elephant in the living room.

    http://ducknetweb.blogspot.com/2011/01/sec-goldman-sachs-fac...

  • Report this Comment On January 05, 2011, at 3:28 PM, TMFKris wrote:

    Perhaps FB focuses relentlessly on the quality of its product; I don't think it does a very good job if the product is the system that users use (as opposed to FB as an info-collecting machine for advertisers). I don't find the "upgrades" useful, although I'm sure I am not a typical FB user. Also, and I have no insight at all, but the more money Zuckerberg is supposedly worth, the more people defer to him, the more power he gets -- the more he may be becoming interested in money.

    Kris - TMF copyeditor

  • Report this Comment On January 05, 2011, at 6:00 PM, xetn wrote:

    Just how is GS getting around the 500 investor requirement that the company be public?

    Oh right, the government is loaded with ex GS execs. Perhaps they are not really exs.

  • Report this Comment On January 05, 2011, at 6:05 PM, TMFHousel wrote:

    "Just how is GS getting around the 500 investor requirement that the company be public?"

    Having over 500 investors doesn't require a company to be public in the sense of an IPO. It just requires that the company make its financial information public.

    Here's more from Andrew Ross Sorkin:

    'While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients."

  • Report this Comment On January 06, 2011, at 4:13 AM, Venkyj wrote:

    You are probably right in your analysis of financial prospects of Facebook. It is also possible that Goldman or DST could influence a change in management philosophy to monetize the huge potential of Facebook.

  • Report this Comment On January 06, 2011, at 5:02 AM, joaquingrech wrote:

    I really can't say much about fb. All the media is talking about it (even yourself in here!).

    I remember when GOOG went public. Tons of people was saying the same thing, that valuation was nuts at $85 or so. That the company had to prove so many things before it was valued in those multiples. Then look at it today...

    My point is that we have no clue about fb finances. It might be worth $5bln or $100bln. We are just talking out of thin air in here, and the media is selling nicely their newspapers and getting ads money on it. Including the Fool site ;)

  • Report this Comment On January 06, 2011, at 6:59 AM, Poooooo34ooop wrote:

    Facebook reminds me a lot of AOL. They dominated, all the talk of the town till suddenly nothing. Something else comes, the seasons shift, times change. Could this happen for facebook? Will a young startup emerge? Likely.. http://www.youtube.com/watch?v=EB2xhHI-AcA

  • Report this Comment On January 06, 2011, at 9:24 AM, griderX wrote:

    "He wanted a great company, which he obviously distinguished from a profitable company."

    But when you build a great company you would more than likely be able to make it a profitable company ;)

    I have also been trying to rationalize the $50 Billion valuation. However some key statistics have been winning me over

    - User time spent of Facebook is becoming the ultimate TimeSink...I bleive average user spends around 7 hours a month which pales in comparsion o Yahoo and Google at about 1-2 hours.

    - Entire gaming companies (Zynga, Playfish) were built around Facebook!

    - Facebook is slowly taking advertisers away from other media

  • Report this Comment On January 06, 2011, at 10:30 AM, DanielLong wrote:

    facebook ipo looks to be more like Google than say, Vonage. FB should be able to withstand high valuations for some time, unlike vonage which has yet to turn a profit.

    http://stk.ly/eVARqF

  • Report this Comment On January 21, 2011, at 4:53 AM, Fundament wrote:

    Nobody knows but true is that Facebook is only the number two in social networking. The most successful social media network by financials and users comes from China. While almost none of the 1.3 billion populations have ever heard of sugar's platform, nearly 636 million people use the Chinese internet platform to communicate and share private stuff.

    Here is a company that is listed on the Hong-Kong Stock Exchange and leads the Chinese market for social networking. The company has a market capitalization of USD 44.2 billion and 636 million users. It serves USD 1.3 billion cash and generated sales in an amount of USD 1.8 billion; Net income was USD 0.7 billion.

    http://t.co/9CHx7Ja

  • Report this Comment On January 31, 2012, at 12:04 AM, MHedgeFundTrader wrote:

    The street is chattering today over the prospect of an enormous payday with the imminent IPO for the social media company, Facebook. Price talk is valuing the company as high as $100 billion, making it the largest such floatation in history. Could the mega deal spell the end of the current bull market?

    Look at it this way. That is $100 billion that gets sucked out of the market. It is $100 billion that gets diverted away from existing equity allocations. Many investors will need to sell existing positions in other companies to pay for their new Facebook shares, especially in the technology sector.

    Can the market afford to lose $100 billion in buying power in its current fragile condition? I think not. Take a look at the chart below which has the (SPY) making a near parabolic move since the beginning of the year. At the very least, we need to pull back to just above $126, which takes us down to 1,256 on the S&P 500, smack dab on the 200 day moving average. If you don’t believe me, then take a look at the chart for the financials sector ETF (XLF), which has led the market this year and is clearly rolling over.

    I’ll tell you who the big winner in a Facebook IPOP will be. The San Francisco Bay area. $100 billion is a ton of money to pour into a single urban area. The issue is expected to create several billionaires and as many as 3,000 new millionaires in my neighborhood.

    The last time that happened was when Google (GOOG) went public, creating a wealth effect that never went away, taking the waiting list for a new Ferrari or Tesla out two years. Better buy real estate near Facebook’s Menlo Park headquarters, such as in Atherton, Palo Alto, and Mountain View. The bidding wars are about to begin!

    The Mad Hedge Fund Trader

  • Report this Comment On January 31, 2012, at 8:17 PM, ETMatyahoo wrote:

    Perhaps orchestrated "flops" are an insidious way of de-leveraging the actual money to reflect the ...err... eventual true value of what is left after the flop has vanished money?

    Firming up the U.S.D. ?

    No I'm not on drugs, I'm listening to Tom Waits & Firewater (On Pandora! NYSE:P , 13ish today)

  • Report this Comment On February 14, 2012, at 11:02 AM, naughtyguy wrote:

    facebook is like Kmart...the leader until something better comes along...(It probably is worth a FEW billion!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1417330, ~/Articles/ArticleHandler.aspx, 11/26/2014 11:46:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement