This post gives an insight of the hot topic on facebook’s initial public offering causing a fever of excitement for investors. The intention is to trigger a feeling of doubt and awareness about an overheated discussion by questioning the basis of the firm’s valuation.
After a cinema night out in the ‘Social Network’ one could feel the urge to dig to the ground of the actual financial background of the company behind the website appearance – specially, after the incredible speed of growth. Everybody signed up to this site knows what to expect, but have you ever paid for anything? How can one valuate a private company without the obligation to supply the public with annual reliable figures to profit, loss and expenses. Is the following comment sufficient to reason a buy of shares : ‘This is a website where hundreds of millions of people go daily to trade photos, catch up with friends and family, and share the trivia of their daily lives. (…) How can it not make money?’ says Michael Brush in Company Focus (7/20/2010). All these thoughts resulted in my findings in the Guardian and moneycentral.msn .
Graeme Wearden wrote an article for the guardian showing the downside of the boom around the possession of a stake of facebook. Trading for up to $76 on the secondary market. This implies it’s value as higher than eBay and Yahoo!. Consequently, I’m asking myself whether this valuation is really sound and it makes sense that the public’s demand contributed their part. Here Wearden points out the danger of artificial inflation, meaning the limitation of stock (due to regulations of private companies) encourages investors to pay more for the stake than a fundamental valuation on the basis of real growth and long-term revenue would reason.
Additionally, overall companies earning their money nearly entirely in the internet world are usually valued with a higher price-to-earnings ratio (e.g. 17x). This is mainly due to the ability of converting popularity of a non-paying audience into revenue, whereby facebook’s client are attracted according to the system of : ‘The people want facebook, we want facebook’. But exactly this phenomenal makes such a firm difficult to assess.
Concluding, on the basis of the speculative valuations of facebook the ‘un-official’ stake is over-valued, though after a public offering facebook wouldn’t be able to use the advantage of these speculation to their benefit anymore and would be committed to publish their advertising revenue. This could cause that shareholders expectations would face a sudden contrast of reality and the sharevalue could drop. Further when the firm’s growth switches from a boom to sustainable growth anxiouse shareholders could react alarmed, affecting the share course. Further David Kirkpatrick, author of The Facebook Effect, suggest that Mark Zuckerberg most probably is aiming for further growth, still using up a major part of earnings, which would have a negative effect on final profit and alarming shareholders looking at the trend superficially.