Excuse me for raining on the Facebook parade, but yesterday's news about the $450 million investment by Goldman Sachs (GS) and $50 million from Russia's Digital Sky Technology didn't move me the way it seemed to move others. This despite the suggested $50 billion valuation, as big and beautiful a number as the stock market has seen in some time. I am certainly not moved in the same way it appears to have moved Goldman's own clients: the Wall Street firm has pledged to line up another $1.5 billion in sales to its high net worth investors, who are said to be champing at the bit to get a piece of the action, which starts with a $2 million minimum. Not that I have $2 million lying around, but I wouldn't buy this stock if I did.
Reason #1: Someone who knows a lot more than I do is selling. While the identities of the specific sellers remain unknown, the current consensus seems to be that most will be from venture capital investors like Accel Partners, Peter Thiel, and Greylock Partners. Maybe Mark Zuckerberg will kick in $50 million or so himself, just for some fooling around money.
But it's not a dilutive primary offering from the company. "Facebook needs no cash!" say its cheerleaders. Okay, fine. Let's just say for argument's sake that it is early stage investors who are selling. Why would they sell? Because they're in need of cash to invest somewhere else? The way the social network is talked about these days, it's the best investment opportunity in town. So why would anyone want to forsake it? And don't give me that crap about VCs being "early stage" and wanting to cash out of a "mature" investment. These people are as money hungry as any other institutional investor, and would let it ride unless….they saw something that suggested that the era of stupendous growth was over.
Facebook reached 500 million users in July. There's been no update since, even though the company had meticulously documented every new 50 million users to that point. Might the curve have crested? And let's not even talk about the fact that they don't really make much money per user — a few dollars a year at most. (Its estimated $2 billion in 2010 revenues would amount to $4 per user at that base.) I certainly haven't spent any money on the site, despite being a fairly regular visitor. And any advertiser who is trying to target me on the social network is wasting their money. But that's just me.
Reason #2: Goldman Sachs. I've got nothing against Goldman Sachs. Hell, I worked there. But when Reuters' Felix Salmon says that the Goldman investment "ratifies" a $50 billion valuation, he's only half right. That is, someone, somewhere—perhaps the Russians at DST Global—might just believe this imaginary number. (It's hard to see why, though: DST got in at a $10 billion valuation in May 2009. Facebook's user base has more than doubled since then. So its valuation should…quintuple?) But concluding that Goldman Sachs believes in a $50 billion valuation is poor reasoning. As Salmon does point out, Goldman has likely earned the lead book runner slot in any initial public offering.
Consider a 20% sale of the company in such an event – or $10 billion at today's "valuation" – and a 2% underwriting fee of $200 million. Goldman would have to share such spoils, so let's call it $100 million into their pocket. Subtracting that underwriting fee from the Goldman investment, and you could easily make the case that for a net purchase price of $350 million, Goldman's ante only values Facebook at $39 billion. Hey, that's just off by $11 billion, so don't worry about it. Buy your shares where you can get them. In other words, go open a $10 million minimum private client account at Goldman Sachs. (Who says Goldman didn't learn its lesson about shafting its own customers? This time around, they've managed to get the customers to line up the shaft themselves.)
Reason #3: Zynga. For all the success of the largely-Facebook-hosted games of Farmville and Cityville, it's hard not to wonder what the success of the anachronistic game maker Zynga really means. Do people really miss their Atari that much? I doubt there's any crossover between the people playing Farmville and those playing the technologically advanced Call of Duty: Black Ops. Which is fine – to each his own. But all the Zynga games make me think about is Wal-Mart (WMT). Which is also fine – there's nothing wrong with being compared to one of the world's most successful companies. But here's the disconnect: if Facebook's future success depends on aiming for the lowest common denominator with the most people possible, that implies pretty slim margins a la Wal-Mart. You think they're going to justify a $50 billion market capitalization through banner ads? Are you kidding me?
Reason #4: The niggling details. Important question: Just what are Facebook's numbers? Important answer: Who the hell knows? In November, Zuckerberg told the world not to hold its breath for an IPO. No worries, Mark, because I'm not. Google (GOOG), if you recall, was pretty open by the end of its life as a private company – everybody knew what it was doing and how it was doing it. Facebook (and, in the same sense, Twitter) reminds me of Kozmo.com during the dot-com boom. Kozmo, you will recall, somehow had people convinced that they were going to make tons of money doing something remarkably pedestrian – that is, delivering Ben & Jerry's by bicycle to Manhattanites. (I remember sitting in the offices of Flatiron Partners way back when. Someone ordered some ice cream on the Web, and – voila! – half an hour later some delivery guy shows up. Kind of like what would happen if you called the deli on the phone. The future was ours to see!) Facebook reportedly pulled in $2 billion in revenues in 2010. I don't know about you, but I'm disinclined to pay 25 times revenues for anything, let alone a company the finances of which I know pretty much nothing about.
Reason #5: Warren Buffett. The legendary investor cautions those looking at outsize valuations to consider one's purchase of company stock in a different way than price of an individual share, whatever it may be. He suggests one look at the total market valuation – in this case, a sketchy $50 billion – and to consider: Would you buy the whole company for that price, if you had the money? The market value of Goldman Sachs is just $88 billion. I'd take more than half that company over the whole of Facebook any day of the week. I bet Warren Buffett would too.
