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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.

  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.

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  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.

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  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.

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  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. :)

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  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.

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  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.

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  7. Alfred,

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

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  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

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  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!

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  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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  11. Facebook surely can’t be serious about thinking they are worth $8 billion dollars. This is what got the tech sector in trouble before. Companies with over hyped, over inflated values and nothing substantial to back it up. I feel Facebook would be lucky to get $1 billion.

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  12. It’s funny that all the bloggers gave Yahoo! such grief for dragging its feet over purchasing Facebook. Now we find out Facebook is nucking-futz but nobody’s saying, “man, maybe Yahoo! was just dealing with this the whole time.”

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  13. Facebook is in an interesting situation. By themselves, they are marketing to a generation that has grown up on the web, and is now trained to be oblivious to ads. Sad.

    However, they are a advertiser’s wet dream. Facebook figured out how to get people to voluntarily submit deep demographic data on themselves.

    So facebook by itself will never reach its full potential unless they also want to get into the business of better content or something else.

    But aligned with yahoo’s network, they could really offer something different to yahoo’s advertisers. How much will a company like yahoo pay for facebook’s information?

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  14. Om
    Thanks for the plug. Its good to see some peoples views on the analysis.

    Dave

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  15. Isn’t this the same thing everyone said about Google, eBay or Yahoo? I remember folks’ jaws dropped when Google apparently refused a $6B acquisition offer…

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  16. a93bucki:

    Google has a market cap of 139B, revenue last year was 6.1B

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  17. Skype founders and backers did the same thing. Reach for the sky and laugh all the way to the bank on exit.

    In response to a comment about Google, I’m no G fan but FB and G are not comparable.

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  18. I’m glad i’m not the only one who think Facebook’s valuation is insane. Thanks for the link to our article. Just one comment to ‘tomo’, I’m just going to throw out a guess here and say that nothing on their balance sheet is going to support a valuation of $1b, unless maybe they have hundreds of millions in cash. The supposed value is in the user base and access to billions of eyeballs per year. Regardless, you’ll never see me paying $1b for it!

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  19. In the beginning there was resistance, lots of resistance. Then after a couple of high profile sellouts their was panic, every speculator was going to be rich, quickly followed by the big bang. What a ride.

    What caused the last big bang is about to cause the next even the mainstream press can feel it. But this time the big balled investors are a little more cautious than before, yet it seems just as stupid.

    I recall one of the first bangers Lastminute.com in a high profile sellout got 850 million UKP, valuing Lastminute on a par with W.H.SMITHs. This was for a little domain name that they picked up for 10 dollars, a couple of PHP coders, and a double page spread in the Daily Mail singing their praises. What a scam.

    After that everyone was hooked and they were all going to be rich. Overnight the internet changed from being a bit geeky, very innovative, and strictly non-commercial to one big supermarket with every vender spamming you with their latest rubbish.

    Of course it went pop, and when it did it was great. For all the commercial interests that were polluting cyberspace with their get rich quick spam, had had their balls crushed and in the aftermath we were left with a much quieter terrain where the speculators had been burnt and innovation could once again flourish.

    Don get me wrong I have nothing against making money but the nature of these speculators have a very negative impact on the general terrain of the internet and heres why.

    Firstly the vast majority of the venture capital investment that is injected into startups is used to not only prop up donkeys but more importantly is distorting the general playing field.

    This manifests in some very destructive ways. Noticeably, most of the real innovation that is at the core of the new functions that emerge online, is created by small groups of programmers / designers who tackle problems and create ingenues solutions which enrich our everyday lives. These are largely small groups of underfunded (if at all) individuals.

    Coupled with this parody is the power of the press, and I’m not talking about the mainstream press I am referring to the new breed of Power-Ranger blogers who just like in the days of the specific industry related ‘trade magazines’ are the current imbeciles of their time.

    So you have a small group of technology related Blogers who have managed to harness a captive audience but who are ignorant to programming, design, and largely technology for that matter but who have found themselves with the ‘important’ title of chef bloger, and who make it their business to blog about what they consider is newsworthy or important.

    Just as with the old trade press journals you are left with a corporatised view on the world where the dinner table talk ranges from who’s been fired to who’s just managed to get VC to the tune of 568 million.

    Clearly this is the scope of the general table chatter and a brief look at Michael Arrington Techcrunch you will see the same old traditional trade journal style of so-called news (hysteria) being covered.

    But burred by these trade like journals is the real startup discussion. The real news is not in who’s about to loose 586 Million because they have invested it into a pile of donkey shit but rather what’s happening on the ground.

    The innovative ground floor is once again being crushed by an ambitious bunch of ignorant money grabbing speculators who in their hysteria do not know the value of a domain name let alone an online travel agent.

    This is not to say that innovation will stop or the current wave of Web2.0 startups won’t flourish as some will, but the survivors of the next big bang wont be the those empty black holes who are being jacked up by VC, instead they will be the the low profile (unfunded) innovators who continue at their own pace despite the noise of what’s supposed to be hot, in the race to be a me-too copycat company.

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