Be warned against the overvalued Facebook and their IPO

By Catholic Online (NEWS CONSORTIUM)
5/14/2012
Catholic Online (www.catholic.org)

To achieve its current valuation, the social media company would have to pull off a dramatic increase in its profit per user.

In our current economy, the Facebook IPO is quite exciting. Mark Zuckerberg, Facebook's CEO, doesn't want to take the company public. The ownership structure allows him to have control over the business because he owns 57.1% of the Class B shares, which have 10 votes each, compared to the publicly owned shares which have one vote each. This means that he has total voting control over the company, which means that this is more like investing into a privately held company.

Zuckerberg has failed to make any of his promises that might imply some faint interest in public shareholders. Buyer beware.

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LOS ANGELES, CA (Catholic Online) - Even if Zuckerberg leaves the company, he will control at least half of the voting power. It is possible the the website will continue to grow and generate revenues. Placing a value on a company is always tricky. Our history shows us, over and over, examples of disastrous valuations that are hard to give looking back. The dotcom bubble of the 90's is one of the best known examples.

In July, Facebook announced that it had 750 million users, a number that looks small only by the company's valuation which stands at $65 billion to $100 billion. So how much is Facebook truly worth? Econophysicists, Peter Cauwels and Didier Sornette, of the Swiss Federal Institute of Technology in Zurich, argue that social media companies are easier to value because their revenue is based on the number of users.

Cauwels and Sornette offer three scenes in which Facebook can eventually plateau at a base of 840 million, a high growth of 1.1 billion, or a case of extreme growth reaching 1.8 billion users. The econophysicists then calculated a value for the company based on the scenario of each user generating $1 profit per year. This gives the value in the base case of $15 billion, the high growth of $20 billion, and the extreme growth of $33 billion.

It's also worth pointing out the assumptions behind this calculation. It assumes that the real interest rates are 0% for the next 50 years, the Facebook's profit margins remain as high as they are now, and the its revenue per user remains constant.

The truth is that Facebook's revenue per user appears to be halving every 3.5 years, a fall that is masked by taking an average. They imply that Facebook will have to improve its profit per user by 1.5 and 6 times.

Sornette, director of the Financial Crisis Observatory at the Swiss Federal Institute of Technology, is quite interested in the value of Facebook. Why? To head off another boom and bust in the stock market when the world can least afford it. A worthy goal, however futile it may prove.

� 2012, Distributed by NEWS CONSORTIUM.

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Keywords: IPO, shareholder, overvalued, money, economy

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