And so Goldman Sachs and the Russian investor Digital Sky Technologies pump $500m into Facebook for a mere 1 per cent. So that means Facebook is worth around $50bn. Speculation that a flotation is imminent is rife. Others say it’s downright ridiculous, and wonder how a company with such modest revenues can be worth so much. “This isn’t dotcom bubble two,” they say, “it’s dotcom madness on a scale never even dreamt of during the heyday of dotcom buying.” We are not so sure, however, and think that the valuation may actually make a lot of sense.

The facts speak for themselves. Here is a company that was set up in 2004. Revenue in 2009 is thought to have been around $800m. Profit in 2009 was thought to have been in the tens of millions of dollars. See: Facebook ’09 revenue neared $800 million http://www.reuters.com/article/idUSTRE65H01W20100618

Okay, 2009 saw better figures than many had supposed. At least the company is apparently profitable, but even so, a $50bn valuation makes it bigger than Yahoo and eBay combined. Why, not even Time Warner is worth that much.

There are some points to consider, however.

First, looking at this from the point of view of Goldman Sachs, they will at least chalk up brownie points. The Facebook flotation, when it occurs, will be massive. And presumably the bank that an article in Rolling Stone magazine described as a ‘Great Vampire Squid wrapped around the face of humanity’ is now the favourite for picking up the flotation spoils – all of a sudden $500m seems like small change.

But there is another point here. Facebook now gets more hits than Google. And presuming the company can get around privacy concerns, has access to huge information on the likes and dislikes of its users. The advertising opportunity it represents is truly huge.

Remember, when Google was floated, many described its $25bn valuation as absurd. And yet in Q3 of 2010, net income was $2.2bn. Looking back, in retrospect one can now say the flotation price was a bargain.

If Facebook can be as successful in converting traffic into revenue as Google has been, then, actually, $50bn seems like a perfectly reasonable valuation.

On the other hand, it seems that Facebook visitors are not so keen on clicking on ads. Apparently it has a lower click through rate than other websites. It’s not difficult to think of reasons why that may be. After all, you go to Facebook to socialise, not to research products you may want to buy. By contrast, many visitors to Google are searching precisely because they are after a good deal, or a new supplier. In other words, Google may inherently be a better advertising medium than Facebook.

The big doubt, however, surely relates to unpredictability. Not so long ago, MySpace seemed unbeatable. Before then it was MSN chat. Do you remember Friends Reunited? This is an industry rife with former good ideas now making up the business graveyard. Who can say whether Facebook will go that way?

The truth is, no one can say. In three years’ time there is a good chance we will look back on the Goldman investment and say what a savvy deal that was. On the other hand, by then the next big thing may have completely supplanted Facebook. Who can say? So any investment at that valuation can be described as a brave move. Or foolish – every potentially brave deed looks reckless and foolish if it doesn’t come off, and downright heroic if it does.

Sure, you could say the valuation is mad. But then you could say the Pilgrim Fathers were mad when they set foot in the New World. Sometimes these things come off, and you can only tell with the benefit of hindsight.

PS By the way, Microsoft must be chuffed to bits; it invested $240m for 1.6 per cent back in October 2007.


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