Web Business Fenom: Facebook

October 28, 2007 – 11:11 pm

There’s a good chance that you have a Facebook account. You probably check it at least once a day, perusing your friend list for new photos and new stalker “status” updates. Since you can import your blog posts right into your profile (like I have done), you might even be reading this on Facebook. The skyrocketing popularity of the social networking site has surprised everyone, except for perhaps early users and its founder, Mark Zuckerberg. There was recently some big news for the (relatively) new company, and it got me thinking about Facebook’s future.

Microsoft Fancies Facebook

Last week Microsoft bought a 1.6% stake in Facebook for $240 million. Doing some quick multiplication, that equates to a company valuation of over $15 billion. That’s not a typo. Fifteen billion dollars. To gain some perspective, it helps to look at this number compared to their earnings. There have been numerous reports that this year Facebook earned $30 million profit on $150 million in sales. With the gaudy valuation Microsoft has condoned, this translates to 500 times earnings. The average Price-to-Earnings ratio of the S&P 500 is roughly 15, meaning your run-of-the-mill company is worth 15 times what they earn. Facebook is still a private company, so they don’t have a formal P/E ratio yet, since the calculation is based on stock price. To value any company that high, though, is fascinating to say the least.

Considering the short amount of time Facebook has been around, this is really a tribute to the power of the internet. As of October 2007, it is reported that facebook.com is the 7th most-visited site on the internet, and accounted for roughly 1% of all internet use in the week of October 20. Anything that popular is worth something. Zuckerberg’s out-of-the-box concepts like the social graph are the basis for the company to remain successful. But what lies ahead?

The Future of Facebook

Tech companies have notoriously high P/E ratios. The scary thing about this crazy valuation is that it looks eerily similar to many .com stocks that crashed the NASDAQ in 2000. Many companies that burst the bubble had P/E ratios that were higher than Ricky Williams, and it turned out that those stock prices were much more than any of those companies could ever sustain. I’m sure Facebook supporters will be quick to compare the company to Google, which has steady grown into the biggest Internet company of all time. Assuming that Facebook keeps growing, there’s no telling how big they can become.

Yahoo! was in talks throughout the summer of 2006 to acquire Facebook, with the final offer of $1 billion being turned down by Zuckerberg. Many people, including myself, thought that he was crazy to turn down such a large sum, thinking that valuation was extremely high. Now, less than a year later, Yahoo! might be regretting its decision not to pony up more dough. It seems clear that the Facebook leadership team is not looking to sell anytime soon; they have bigger plans.

Facebook IPO?

Quick business lesson: an IPO is an Initial Public Offering, in which a private company sells stocks for the first time to raise capital. Generally these are offered by smaller companies that need more money to expand. For an investor, these can range from risky (the majority) to slam-dunks (Google). Facebook would seem to be in the latter category, at least for now.

So, how soon before they go public? Hard to say, but it could be sooner than you think. With the news of the Microsoft buy-in and rumors that two prominent hedge funds will supply $500 million more, the company looks like it shouldn’t have a problem creating capital in the near future. It really depends on Zuckerberg’s overall goals for the company; it’s conceivable that he will keep them private for a considerable amount of time. If Facebook continues with its current trend, it is going to be one popular stock when they dodecide to go public.

Will Facebook follow Google’s lead and realize these amazingly high valuations? Or is it doomed to failure? Time will tell. I do think I’ll set aside some money to buy a couple shares when they’re available. I’d be a fool not to.

(Before anyone feels the need to chime in, I know that I misspelled ‘Phenom’ in the title. It was a clever stab at some alliteration and to get you to read the post. And you thought I couldn’t spell.)

Tags: facebook, Finance, google, ipo, mark zuckerberg, microsoft, p/e ratio, ricky williams, Web, yahoo!