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Brett Arends' ROI
Jan. 4, 2011, 12:00 a.m. EST
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By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” I hate Facebook.
I hate the moronic games, the Big Brother factor, the mindless drivel people post on their walls.
But is a $50 billion valuation really too high for this company? Unfortunately, it may not be.
Dennis Berman has details of a $500 million deal with Goldman Sachs and Digital Sky that effectively values Facebook at $50 billion.
The Street is abuzz over the weekend's news that Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 173.05, +4.89, +2.91%) and Russian investment firm Digital Sky Technologies have plunged $500 million into Facebook in a private deal, valuing the company overall at that hefty figure. Read more about Facebook's IPO pressure.
(News that Goldman, Facebook and some Russians have teamed up is surely grist for conspiracy theorists everywhere. Where's Lyndon LaRouche when you need him?)
A lot of people are taking this deal as a further sign of an Internet "bubble." It comes not long after Groupon, a group-shopping site featuring daily deals, reportedly turned down a $6 billion takeover approach from Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 604.35, +10.38, +1.75%)
But investors may be overlooking one timeless principle: Nobody ever went broke underestimating the intelligence of the public. Mark Zuckerberg is unlikely to be the first.
Everything about Facebook is gigantic.
The company says it has more than 500 million users, and more than three-quarters of them are overseas. It is growing like Topsy. More than half of users log on every day. In total, Facebookers waste "” er, "spend" "” 700 billion minutes on this website every month. That's 23-1/2 hours per user. No kidding. That's roughly the equivalent of a full day each month, or three eight-hour workdays, every month. According to comScore Inc., people worldwide now spend more time on Facebook each month than they do on all of Google's sites.
In this context, the Goldman deal doesn't look quite so crazy.
Even if Facebook didn't add a single extra subscriber from here, a $50 billion market value would work out at $100 per user.
Is that too much? Think about all the data Facebook has about you, what you do and what you like. Think how much stuff its advertisers can sell you.
To earn a 20% return on $50 billion, without any growth in subscriber base or traffic, investors would need Facebook to make $10 billion in net income per year. That's just $20 per user per year. It's 7.1 cents for each hour one of them spends on the site.
Justified? History will be the judge. But crazy? Hardly.
Facebook keeps its finances private, so we don't really know what the company's making. But its reach and stickiness suggest it must have plenty of opportunity to convert traffic to money. It's not exactly a hardship to make those kinds of numbers from advertising and other services.
Whether Facebook can sustain its position is another matter. There are plenty of challenges ahead.
On the Internet, it's hard to keep people's interest for long. To the kind of people who spend 23-1/2 hours a month playing FarmVille, everything is a fad. The Web is littered with the future titans of yesteryear.
But this valuation isn't ridiculous. I wish it were.
Brett Arends is a columnist for MarketWatch and The Wall Street Journal, based in Boston.
Brett Arends is a columnist for MarketWatch and The Wall Street Journal, based in Boston.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co.
Booksellers Barnes & Noble and Borders Group have had their share of challenges, but this holiday showed Barnes & Noble's luck may be changing, writes Angela Moore.
12:33 p.m. Jan. 3, 2011
"Why Facebook may be worth $50 billion http://on.mktw.net/hneJQP" 1:03 a.m. EST, Jan. 4, 2011 from MKTWArends
"Wall Street wins, Main Street pays "” again http://on.mktw.net/ianWdp" 12:53 a.m. EST, Dec. 21, 2010 from MKTWArends
"Biggest bankruptcies weren't on Wall St. http://on.mktw.net/fL1hty" 12:32 a.m. EST, Dec. 14, 2010 from MKTWArends
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