Tuesday, January 4, 2011

Dot Com Mania II

Is Facebook really worth $50 bn ?? Yes, billion that is, not million. Or are we seeing the second incarnation of the mindless hype that we saw at the dawn of the century which made the word dot com a household name ? Judge for yourself.

What happened yesterday was that Facebook raised the first tranche of $500m funding from Goldman Sachs and a Russian investor. Goldman Sachs is putting $375m of its own money . Extrapolation is always a dangerous thing, but if you take the licence of using the same valuation per share to determine the value of Facebook as a whole, it somewhere close to $50 bn. Facebook is not a listed company; so we should be careful. But still such a stratospheric valuation ??

Facebook's revenues are reputed to be some $ 2 bn. This all seems to be old style internet ads - very few media companies have succeeded in that space. Google is different - its advertising model is such that a fair proportion of the searches actually lead to a commercial transaction. Clicks through to Gils on Facebook may yield captivating information on this incomparable blogger and such attendant pleasures, but are unlikely to yield even a dime !

So why this valuation ? I suspect another avatar of the dot com mania that gripped the world in its first edition. Great businesses are built on great ideas alright. But they also need boring stuff like profit and loss statements. They need resilience (regular readers will note this flavour of the month). They need robustness. They need sustainability. Then stratospheric valuations are justified.

It would be fairly obvious by now that this blogger is not a fan of Facebook. The only reason he enters its portals is to play an occasional game of Scramble. He is completely unable to fathom the joy of posting his mugshot or boring mundane everyday activities for the world to see. Readers might deduce from this admission that he's a bit of an old foggy.

Well, he's in elite company. Warren Buffet was called an old foggy in Dot Com Mania I !