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Face it, Facebook’s not worth $95bn

May 9, 2012

Facebook has named the range for its impending IPO with a share price of $28-35. That’s an unusually wide range and targets a value between $85-95 billion; in other words a little caution has set in since talk of $100 billion+ and the chill is partly down to the surprise drop in profit YonY for the first quarter – $205 million, down from $233 million.

The company and its advisers brushed the drop aside as a cyclical dip and also a result of the costs of preparing the IPO. They’re right, you can’t read too much into it. Nor into the slowdown in growth of sign ups and users – just a blip.

But if you can’t read too much into the negatives, how come you can read so much into the positives? How come you can read $95 billion into them? Facebook is a phenomenon, no question. And it has a dominating market share in its segment. And it has (had…?) what looks like unstoppable momentum. But $95 billion is a big bet on all that continuing and all that getting monetized.

First let’s have some context for $95 billion. If we take the mid range of $90 billion, that value would place Facebook 64th in the world’s biggest companies by market cap on the Forbes 2011 list, just ahead of Stat Oil of Norway – which has sales of $111 billion and profits of $13 billion. Extrapolating Facebook’s Q1 sales of $1 billion (up 45 per cent YonY, i.e. the profit margin has collapsed), gives it $4 billion, call it $6 billion with likely continued growth. That would place it 1,240th on the Forbes list. If profits stay flat for the next quarter (as Facebook itself predicts) and improve say 50 per cent in the second half, that would give them $1 billion profit and would place them 620th on the list.

OK but the value is not about the near term is it? That’s true, it’s all about the future. And where is the proof – or even the sign, that Facebook will be able to monetise its 900 million (and growing, but more slowly) audience?

There is no question it is the 800lb gorilla that sits where it wants in social networking (though Twitter will argue even with that). It has a scale that means no one can challenge it at what it does. But that doesn’t mean many, many smaller networks for interested groups and demographics won’t chip away. Could Facebook be too big, too homogeneous for audiences looking to differentiate themselves?

And having the whole planet on board (I exaggerate) doesn’t mean they’re all using the product. Indeed, the point is the users are the product. And selling them without alienating them is the $64 guzillion question that has always haunted Facebook and always will.

Combine the constant restless interest in the new (Facebook is now Old by internet standards), nervousness over data privacy and a resistance to themselves and their relationships being sold, and could you have a perfect storm that will see Facebook follow the Bebo route to oblivion? I exaggerate again, but all these factors could slow it significantly enough to make $95 billion seem way too much. A completely scientific poll of my two teenage and one twenty something household (the real adults don’t Facebook; that would be as embarrassing and out of place as reading Harry Potter), shows creeping Facebook fatigue.

So, am I just an aging nay-sayer of all things internet? It is true I remember well our own little TMT recession of the early noughties, brought on by the likes of and AOL. But you wouldn’t have found me cynical about the flotations of Google or Amazon. Google has more than justified its (much lower) valuation and its impact on advertising increases every day. But then that’s what it’s about; if I’m using it to look for a dentist I’m not going to mind too much of some dentist advertising comes up. Likewise, Amazon does what it says on the tin – sells me more and more stuff online in an online store. Facebook does what it says on the tin for nothing, that’s the whole point. It has to make users do something they didn’t sign up for in order to make a profit. Good luck with that.


Categories: Blogs, Business, IPO, Nick Snow