Monday, January 3, 2011

Is Facebook overvalued?

Digital Sky Technology did offer in October 2010 some of it's Facebook shares (but then invested again $50 Million this week).
On Tuesday a German investor in Facebook sold all his his shares. Thomas Heilmann had a stake in the social networking website “in the area of one-tenth of a percent” at the beginning of 2009, without specifying the exact size of the share. The current valuation of Facebook is “crazy,” Heilmann said in an interview with Tagesspiegel (

All this could be an indication that FB investors are believing that FB is overvalued. Or as Mr. Heilmann says "crazy".

Investors have usually a deeper knowledge of the financial situation of the invested companies. Another Interesting point is that Facebook just now got another investment of $500 Million. If their system would work really well and revenue (estimated $2 Billion) is higher than costs, why is there a need to get another investment in?

The shares at second market are skyrocket which is the base for the estimated value of $50 Billion. Everybody who wants (and can afford) to buy shares through or will now pay over $110 a share. A lot of people have a hope that FB will go as well or better than google.

Google started in 2004 with $85 a share and raised within the first day by 20% and had an Initial Market Cap of $23 Billion. Which was big. We are now 6 years later and Google has a market cap of $193 Billion. This is 8.5 times of original offering. But the profit margin is only 29% (Baidu, and AOL have a higher margin. Baidu has over 43%).

Facebook would need to start with am initial market cap with $35 to $50 Billion which is not too far from realistic, if we take in account that we are now 6 years later. has already $1.3 Billion in FB shares to offer, which most of them are coming from early investors

Big difference in Google and FB is that was in 2004 only number 5 website ( behind yahoo, Microsoft, Time Warner and eBay). Facebook is already number 1 and higher valued than yahoo or eBay.
On the other hand when people search for something they are more likely clicking on ads then when they read posts from friends or play games. Games make already 30% of FB traffic.
Which is not too bad for FB because mot of the games make revenue by selling virtual goods and these have the bought through FB using facebook credits, which FB gets 30% of it.
In matter of facts the biggest losers right now on FB are their own apps like links and notes.

The good news are that brands are going more and more into Facebook and have their own fan page with e-commerce, which is missing in google. Google only offers click away. On the other hand Facebook can offer much better personalized ads then any other website on the web.
Plus the trend goes away from "click" thinking and more to ad penetration.

All these are good indicators that FB could be big, bigger than google.

Let us summarize. google only income at the time back was through ads. Facebook generates (if it works well) through ads, FB credits and e-commerce (fan page with shop must pay to FB a certain amount for each sold item through FB). these are already 3 types of revenue income.

But on the other hand the government is trying to build a new law which does not allow anymore to send too many user information to advertisers. If this law goes through then the advantage of FB will be much lower.

And there are the costs. Facebook is build on open source like php and mySQL which saves a lot for software license but needs much more hardware. FB is already leasing over 50,000 servers.

Infrastructure is expensive. All the new features and initiatives add up to more users, more traffic and more growth. And that means more servers and more data centers. Facebook is currently spending at least $50 million a year for leased data center space. As the company moves into the data center construction business, that spending will jump significantly.

The company is approaching completion on its first company-built data center in Oregon, representing an estimated investment of between $180 million and $215 million in construction costs and IT equipment. Facebook recently committed to spend $450 million over the next five years to build a second data center in North Carolina.

This means most of the investment goes into Data Center. And Facebook is still hiring people and need soon more office space. All together can easily cost 2 Billion. I believe right now, if FB goes public and generates revenue as expected, the profit margin would be far under 10%, which is lower than industry standard (profit margin for internet information provider average is 21.7%), and this is what the investors see and maybe sell their shares. For them FB in terms of profit margin does not seem to be very lucrative.

I am just happy that i have not enough money to think about investing into FB.

Facebook IPO Stories summarized below

1/2/2011 Facebook has raised $500 million from Goldman Sachs and a Russian investment firm in a deal that values the company at $50 billion, The New York Times reported. This indicates that Goldmann Sachs will be most likely the FB IPO bank.

10/8/10 Investors offered a slice of Facebook (Financial Times), a subsidiary of Digital Sky Technologies, could go public later this year. A portion of DST's stake in Facebook is expected to be owned by

10/1/10 Facebook does 5-for-1 stock split (CNN Money) The company is splitting its stock for the third time in its history.

9/28/10 Facebook Board Member Says Possible IPO In Late 2012 (SmarTrend) Board member Peter Thiel has said that the company may hold their IPO in 2012 if they meet revenue targets.

9/27/10 The Value of a Piece of Facebook (New York Times) The secondary market for the company's shares continues to be active. Most recently the company was valued at $33 billion based on private transactions.

8/19/10 What's Facebook Really Worth? (MoneyShow) Most estimates currently value the company at between $30 million and $60 million.

7/30/10 Facebook Said to Put Off IPO Until 2012 to Buy Time for Growth (Bloomberg) Facebook likely won't hold its IPO until 2012. This would give the company time to find grow additional revenue streams and give the CEO time to perfect the skills needed to lead a public large-cap tech company.

7/24/10 Facebook IPO "when makes sense": CEO (The Economic Times) CEO Mark Zuckerberg is waiting until the time is right for his company's IPO.

6/28/10 Elevation Invests Another $120 Million in Facebook as that IPO Looks More Distant (TechCrunch) Elevation Partners went to the secondary market to buy another large amount of shares in Facebook.

6/17/10 Facebook '09 Revenue Neared $800 Million (ABC News) Facebook is in better financial shape many had believed in the past. Impressive growth catapulted their revenue to the $800 million mark in 2009.

6/3/10 Facebook CEO says no date in mind for IPO (Reuters) CEO Zuckerberg does not worry about possible dates for the company's IPO. He's focused on running the business.

3/3/10 Facebook Valued at $11.5 Billion in SharesPost Index (Bloomberg Businessweek) If you use transactions in an index on the SharePost website as a guide, Facebook is worth $11.5 billion.

1/26/10 Facebook investors: Seriously, no IPO this year (CNET) Investors Jim Breyer and Yuri Milner say the IPO won't happen in 2010.

1/14/10 Facebook Shares Just Keep Climbing (Forbes) Facebook shares have risen to $32 apiece on SharesPost. That values the company at $14 billion.

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