Dotcom bubble: what madness? How could anyone have been so stupid not to have seen it coming? And then it happened again, a company with a p/e ratio off the charts, a track record going back just a few years, founded by a person/persons so young they looked as though they should still be at school, and yet they queued up to buy shares on flotation. How stupid was that? It is just that it may not have been so stupid after all. Replace the word Facebook with the word Google and things look much the same, except we can now look back with the benefit of hindsight, and say that Google was cheap when it was floated. It is just beginning to look as though Facebook was cheap too.

The latest result from Facebook told an impressive tale. Sales were up 53 per cent in the latest quarter, profits were up by… well …numbers can’t tell us, because the company went from losing $157 million in the equivalent quarter last year, to making $333 million profit this time around.

Now look at the company’s valuation. Its market cap is $83 billion. Turnover was $1.81 billion in the latest quarter. That is still quite a multiple. Just bear in mind, however that on flotation the p/e was… well, as the company was making a loss at the time, it was infinite.

Now consider a story doing the rounds a couple of months ago. The ‘Guardian’ in particular made a lot of noise about it. It cited research from SocialBakers indicating that the company had lost four million users in the US in just one month. It was a real ‘woe is Facebook’ story; proof, or so many said, that the company was full of naïve hope over reason. It is just that SocialBakers reacted to the ‘Guardian’ story saying: “Sometimes, journalists get stats wrong. The Facebook stats found on our page are not primarily intended for journalists, but rather Ad estimates for marketers.” It added: “Around 50 per cent of the UK’s entire population is on Facebook – which is amazing!” and suggested: “The bottom line here is that there is no story.”

Jan Rezab, CEO at SocialBakers, said: “We previously published a clarification to one of The Guardian’s articles three months ago. In this article, I explained the stats in question, revealed the source of the stats, and admonished journalists against jumping to conclusions about them going forward. Well, The Guardian did not heed the advice, jumping to an even bigger conclusion this time.”

And that in a nut shell says it all. No one can really know for sure whether Facebook is worth its current value, but to laugh it off is not wise. It is fun to suggest companies such as Facebook are made of little more than smoke and mirrors, but little things like facts are rarely allowed to get in the way of a good story or indeed a bit of fun.

Take the argument that Facebook can’t make money from mobile advertising. In the latest quarter mobile advertising made up 41 per cent of the company’s ad revenue.

Consider the story of Google. Its share price has risen from around $100 in 2004 when it was floated to around $900. Yet during this time, its p/e ratio has crashed, so that now it is around 26 – still highish, but nothing spectacular. At flotation, Google’s market cap was around $23 billion, now it is making more than that in profits in less than a year.

Facebook has another similarity with Google. Back in the mid noughties, soon after Google was launched, its Ad Words program represented perhaps the most cost effective form of advertising ever invented. The markets did not get that, which is why they undervalued the company. It is not like that now for Ad Words, of course; the auctioning process has seen to that.

Today it is Facebook that seems to represent an incredibly cost effective advertising medium. This is why its revenue will probably continue to grow at a very rapid rate for some time, and profits to revenue will probably grow too, meaning that total profits may yet grow at a rate that dwarfs even the growth enjoyed by Google during its golden period.

No one can say for how long Facebook will occupy such a high proportion of the world’s consumers’ time? It may or may not go the way of MySpace, but based on current popularity the potential for the company to increase profits is enormous.

© Investment & Business News 2013