19 Comments

Summary:

In the comments of our piece, The Return of the Tech IPO, David Coleman pointed out that Facebook and its $8 billion valuation might just be the proof that we are all getting bubblicious. Coleman, on his blog, goes on to dissect the irrational exuberance that […]

In the comments of our piece, The Return of the Tech IPO, David Coleman pointed out that Facebook and its $8 billion valuation might just be the proof that we are all getting bubblicious.

Coleman, on his blog, goes on to dissect the irrational exuberance that some of the Facebook backers might be indulging in. Some of his assumptions (like revenue and profit projections we can’t vouch for,) but his argument makes a lot of sense.

Looking at it another way, assuming that Facebook has an extremely healthy profit margin of 24% (like Google for example), the company would have earned about $12 million in profit for the year. At that rate, Facebook is valued at 666 times its current earnings. ….. Facebook, was last estimated to have around 9 million users, so at that valuation, it would be worth a measly $52.2 million! At a $1 billion valuation, Facebook was looking for $111 per user. At $8 billion…well you can figure it out.

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  1. What’s interesting about Facebook, MySpace, etc. is that they are strictly ad-driven.

    If Facebook were able to offer premium features to members turning it into a pay-per user, they would easily be able to reach that lofty valuation.

  2. what premium feature do you think would work andrew. the ones kids will pay for. just wondering if you had some thoughts on that.

  3. I don’t know if we are in or heading towards a bubble again, but it pretty obvious that Facebook would be fools to turn down anything that even resembled $1 Billion dollars.

  4. who knows, peter may be sandbagging and really believe the company is worth more than $8B. without out access to their balance sheet you are wasting your time on ignorant speculation. remember when people thought google was too big for their britches with the dutch auction ipo share price of $100? it came out at $85 and the market and smart money waiting to invest sure showed them they weren’t worth nearly what they thought. :)

  5. I think the valuation is crazy. I think the “we are not for sale” is an excuse to forgive themselves and tell themselves that “Yes, we were greedy, and we should have went for the Yahoo deal, and now its too late but we do not want to appear like morons to the web 2.0 crowd”.

    Brutal but honest opinions of mine.

  6. Pay per user features (e.g. subscription features and tiers) might add to the revenue stream a bit, but it won’t get them to an $8B valuation. Just ask Yahoo or RealNetworks. This is especially true with consumer services that started out as free. Making the transition from free to paid is a very difficult thing to do. Almost like re-inventing the business.

  7. Alfred,

    I can guarantee you that Facebook doesn’t give a shit about what the web 2.0 crowd thinks.

  8. Andrew #1,

    I don’t think Facebook’s user base would pay for any premium features, unless Facebook journeys well beyond their current scope (and even then it’s tough to imagine features that would convince a younger crowd to take out their wallet). Better photo sharing, video sharing, etc. are all available for free on the web. Textbooks exchanges/sales already exist, and don’t fit well in the social atmosphere on the site. Classifieds/auctions would need to be free.

    I think Facebook has a unique position as an ad channel to a core audience, but that position won’t be indefinite. As I’ve stated before, their audience may be addicted to the functionality of the site, but aside for the network switching costs, Facebook doesn’t have many barriers to entry. For them to assume they’ll be one of the only media giants without competition in the industry going forward is probably not a wise assumption. It’s interesting to note also that none of their recent feature launches have garnered much interest, and certainly didn’t create any new revenue channels.

    I’ve always had an idea on how Facebook could really monetize their service beyond serving ads, but I’ll leave it to them to figure out ;).

    -Andrew #2

  9. What confuses the heck out of me is how Facebook can (with a straight face) say that somehow they are worth 5.6x’s more valuable than someone like CNET. Let’s work the some math…if Coleman is off his revenue estimates by 4x…that would put FB revenues at $48M and at a similiar P/E of Google, CNET, and eBay (~54 P/E) they are somewhere in the neighborhood of $2.6B…and btw has anyone looked at GOOG lately…their market cap is ~10B…so as you go into the holiday, tell me…is FB worth 80% of GOOG.

    Will someone please tell Zuckerberg and Thiel to put down the bong and enjoy the eggnog…it is the holiday season!

  10. I don’t think the inherent value of Facebook or MySpace comes from the social network itself. The social network is simply a prime demographic one can target.

    Let’s take MySpace. How do they make money other than ad-based advertising? They don’t (not in significant numbers). But with it being under the control of Fox, a huge media giant, they have opportunities to monetize this social network by feeding it traditional media (look at how they’ve used it to advertise Fox shows, Fox movies, etc.).

    Based on my anecdotal experience, MySpace’s core demographic are teens/pre-teens while Facebook’s core demographic are college students. Instead of thinking about what premium services Facebook could offer, it’s more important to think about how this college demographic can be monetized in other ways (eg, traditional media).

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