Is Facebook Overvalued?

Today is 15 billion dollar day at Given that just about every piece of news related to Facebook today is about Microsoft’s investment, I thought I would touch on it one more time. Scott Karp is questioning if Facebook is actually losing value due to their open door policy. His basis for the argument is a quote from Paul Saffo who wrote an Economist article and said “The value of a social network is defined not only by who’s on it, but by who’s excluded.”

While I understand the argument, I completely disagree. To date, social networks have not been built with an effective filtering system to separate among your various affiliation groups. If your professional contacts see pictures of you getting wild in Cancun, that is going to be bad news for you. That has been the primary issue with Facebook but fortunately they have announced that will soon enable grouping features. So while this expresses my disagreement with the inverse of Metcalfe’s law, none of this answers the question: is Facebook overvalued?

Yes! I don’t thing that the present value of Facebook is $15 billion. While financiers may argue that it is worth that because that’s what Microsoft valued it at, I disagree based on a stratospheric earning multiple. The investment was a bet by Microsoft. Eventually Facebook may be worth much more than this but it also was a defensive maneuver to block out Google from access to the highly valued Facebook web search. As Greg Sterling has pointed out, this investment most likely secured Microsoft with access to Facebook’s future web search. While I personally may stick with Google for web search, many users on the web just want ease of use. One less click means a time savings for the user and more money for Facebook.

So while Microsoft’s investment in Facebook, may leave everyone questioning whether or not it was a good investment; the reality is that this was a bet by Microsoft that Facebook will soon be worth much more than $15 billion. I have to say that this was a really good bet. It’s time that Microsoft starts making some serious bets given that they are rapidly gaining the reputation of an old school company that doesn’t have a grasp on the future of technology. Do you think this was a good bet?