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What's Facebook Worth? Not as Much as It Thinks It Is

Facebook's financials and prospects are in the news again. The WSJ's Geoffrey Fowler and Anupreeta Das report breathlessly that Facebook's business is growing much faster than expected and how that increases the odds of an IPO as early as next spring.

But the timing is suspicious, making it seem as if Facebook is trying to bolster impressions of its finances. And that will take some doing, at least with the savvy investors who have the cash that Facebook wants. The company's valuation is already so large that savvier investors are wondering if the company isn't already over-priced.

Facebook's magical media spin
As Nicholson Carlson notes at Business Insider, this piece came out just after stories that Facebook insiders wanted to sell $1 billion in stock at a $70 billion company valuation, but found no takers. It certainly smells like a planted story. Interestingly, early last year former Apple (AAPL) senior marketing manager John Martellaro wrote about a WSJ article at the time that had "all the earmarks of a controlled leak" to a "trusted friend at a major outlet." The article to which he referred at the time was co-written by Fowler.

Perhaps it's all coincidence, but recent cooling of Facebook investor fever isn't. The would-be inside sellers had originally expected a $90 billion valuation, but no one was interested. Even at $70 billion, there's a lot of, shall we say, rational reticence among the would-be buyers.

You want how much?
I had a recent conversation with Bill Davidow, author of Overconnected: The Promise and Threat of the Internet and a long-time Silicon Valley VC (he was senior vice-president of marketing and sales at Intel in the 1980s). Davidow notes that companies like Facebook become unrealistic in what they think they're actually worth:

All companies end up having market capitalization of one time sales unless they end up selling for less than that. Here's my reasoning. A company gets really large and the industry matures. Profits get to six, seven percent of sales. At a P/E ratio of 15, that's roughly one times sales. You look at it and pick any rate of growth you want -- 20 percent, 25 percent. The company ultimately can't grow faster than the world's gross product. When you look at things like Facebook and you say that the limit on where they can get to long term is five times sales, the thing I would want to hear ... is why I should pay a very high price for something that over a long time would sell for that number? In the case of Facebook, with a $50 billion valuation, I'd want to feel that they could get to $20 billion revenue quickly.
Davidow isn't the only investor doing similar math. At $70 billion, the requisite revenue is high, and as BNET's Jim Edwards has noted, there have been many questions about Facebook's valuation. This is just the most recent sign that the social media emperor may a tad under dressed.


Image: morgueFile user cohdra, site standard license.
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