Facebook. What a great way to waste ten minutes of your day. Turns out that it’s also a great way to waste money if you bought into the IPO with shares currently trading at $32 – 16% down on Friday’s launch price. Now there is investigations ongoing into alleged irregularities in the IPO and rumour that they are going to abandon the NASDAQ and move their listing to the NYSE. None of which gets away from the fact that the company is horribly over-valued.
A quick look at the Wikipedia article on valuing a company suggests that there are many different approaches to doing so, however I am going to use the common sense approach to doing so. Lets start with the 2011 revenue – $3.7bn and their profit after tax was approximately $1bn according to a quick Google search. Furthermore, there are 2.14 billion shares and approximately 900 million users.
This means that the profit per share is $0.47 and the profit per user is about $1.11, however they reckon that the amount they make will go down as more and more people move to mobile platforms. Couple this to the fact that advertisers are already beginning to question the value of their Facebook campaigns, and that face that Facebook already counts an eighth of the worlds population amongst its users and the actual potential for growth looks limited.
At a share price of $32 per share, the company is valued at $68.5bn. Lets assume that in five years they increase their user base to 1.5 billion users and somehow manage to get their profit per user up to $2 – effectively tripling their profits and the share price was to reflect this, then the company would still be valued at a shade over $200bn.
Of course, not being an economist or accountant, I could and probably will be massively wrong. I am however a Computer Scientist, and I can say with some certainty that at some point something better will come along. Not a Google+ which offers little more than a different name and logo, but a who new approach to social networking, and when that happens Facebook will find that it and its share price fades rapidly. An alternative possibility is that in trying to monetise its platform to satisfy the shareholders, they will at last succeed in their attempts to alienate the users of the site although the outcome will still be the same.
Here’s a thought for you though… By the time the first commercial quantum computer comes along, Facebook will probably be a footnote in the pages of history, somewhere alongside AOL and MySpace. The computer however will probably have the letters I B M written on the front of it! Here’s one of my favourite bits of self promotion, that kind of shows how you actually build a valuable company.