The Facebook Misunderstandings

People are going back and forth about Facebook but there is one little misconception in the discussions going on. A good post comes from Scoble that highlights the good sides of Facebook. And it is really what the ultra pro gang likes to heard. Facebook is amazing, the widgetization will continue, Facebook will grow without end.
I actually don’t think anybody tries to deny that. What people are disputing is the valuation part of the entire thing. Valuations on the stock market depend on revenues and profits. Otherwise it is hype, and that is what we had in the first bubble and as soon as that hype entered the normal stock market, real people got hurt because they invested in beliefs.
To take a look at the other side you should read this post which talks about a 2008 IPO. The thing most interesting in there is the calculation that Microsoft promised some revenue to Facebook due to a 2006 deal they did. This might be the source of the main revenue of the $100 million Facebook is talking about as revenues for this year. Google’s amazing growth engine has a Price to Sales multiple on the stock market of 14. This means that even at $100 million of revenues, with amazing growth, Facebook shouldn’t be more valuable than $1.4 billion now, with growth factored in as in the case of the Google stock price. Now think if Google’s expertise and business model is something where you can understand that revenue and profit growth will come. Now think about Facebook. The metrics are not as clear. The upside is good but nobody out there has proven it yet. That’s like investing in a start-up and that shouldn’t be something unexperienced people do.
This is what some people think is nuts, and I have to admit I am one of them. $8 billion is just too steep, unless somebody buys it that really needs the expertise and entry into the web area and has an amazing sales team to make money of the site. Let’s see what happens. I have obviously been wrong before.
Update: Of course if they would IPO, then long term it might end up at several billion USD, hence the idea of the IPO. I wouldn’t sell either … but not for the valuation part but simply because Facebook might become a real company with long term potential.

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