1. Lemming portfolio theory. The consensus is always wrong. Facebook is a media love orgy right now.
Lemmings at the Gate
2. Private valuations are opinion, not science. A few years ago the Winklevoss twins used Microsoft’s $15 billion valuation to settle their lawsuit. Meanwhile, Facebook’s board appraised the company at $3.7 billion. Is there more than one valuation in 2011?
3. Goldman Sachs takes care of Goldman Sachs. Is the $50 billion valuation “God’s work” or more engineering from the organization that brought us the Abacus fiasco?
4. At 100x on earnings this multiple is lost in space. Danger, Will Robinson.
5. Growth drives high multiples, but measurements are far from perfect. Here’s what Inside Facebook writes about Quantcast, a firm that tracks Facebook’s stats.
In what appears to have been an unannounced recalculation, the firm is now showing Facebook 129 million monthly unique visitors. That’s the most it has ever tracked, according to the site today. But when we looked last month, Quantcast was showing Facebook had plateaued at 137 million monthly uniques. Apparently there was some sort of methodology change.
6. IPO hurry-up strategy—prime the pump and sell the hype. Facebook’s US traffic during November fell from 133.5 million monthly visitors to 132.7 million. Growth is coming from overseas, but there is no certainty that international revenues will keep pace with those in the US. Is the $50 billion valuation step one of a carefully orchestrated strategy to go public—just in case ad income plateaus sooner than expected?
7. Goldman makes money even when others don’t. Its fees from this deal total $160 million. Its take from a Facebook IPO could be just as big. So how much of the bank’s $450 million investment is really at risk?
8. Smells bad. In order to participate, high-net investors must agree to 4 percent front-end fees, lock-ups on their stock, and zero transparency. I was a HNW stockbroker. I’ve seen this movie before, and the client gets screwed.
9. At 25x earnings, the Google comp argues for a much lower multiple. What was that about a 100x multiple?
10. Caveat emptor striga Architeuthis dux. That’s Latin, more or less, for “buyer beware of great vampire squid.”
The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.
You may feel differently but wherever you are with how much wealth you have, you have to be cautious; knowledgeable; and realistic about investing.
If you do not, people and companies will take advantage.
Raymond Lavine
Gig Harbor, Washington
In my experience, 4 percent front-end fees prophesied future problems.
Thanks for some clear headed analysis.
I agree with your points, especially the lemming analogy. Another glaring fault with the cheerleader analysis is that it assumes smooth and meteoric growth for a long time into the future. Which rarely happens and as soon as it is apparent the growth is going to be slower than expected the valuation makes a big adjustment.
Though the real question in my mind is how much money can they make through advertising. I believe that they will make money and be successful, but the jury is out on how much and how fast they can grow. Plus they are not immune from competition for ad dollars, so they will have to prove sustainable value to advertisers.
This type of over hype is so reminiscent of the first Internet bubble, that it really stretches credulity to think that “this time it will be different”.
I think the question is whether net income grows faster than the multiple shrinks. With Google at 25x, I don’t see how Facebook can sustain a 100x valuation.
Clearly, the company is reinventing the landscape for ad dollars. The issue is not FB’s success. It’s valuation.