Is Facebook A Good Investment At $50 Billion?

By now we've read all the news about Facebook's new round of funding from Goldman Sachs and the $1.5 billion fund being put together for private investors. However does this mean we're finally reaching the peak of Facebook's valuation? Here's our take on the situation.

-Cash Money Icon-By now we’ve read all the news about Facebook’s new round of funding from Goldman Sachs and the $1.5 billion fund being put together for private investors. However does this mean we’re finally reaching the peak of Facebook’s valuation? Here’s our take on the situation.

Facebook Is Definitely Getting Pricey

There’s no doubt that Facebook is a hot company and will continue to be as their revenue surges over the next five years. We have always been confident in Facebook’s various revenue models, however we also believe Facebook’s stock has appreciated excessively in recent months fueled by the liquidity generated through the new secondary markets and non-traditional investment vehicles. As far as I know there is no historical basis to show how a hot company, which was traded privately for an extended period of time performed post-IPO. As such, Facebook has become a relatively risky investment, primarily for two reasons: no knowledge of the liquidity date and much of the company’s future growth is already priced in.

A Google Look-a-like

If there was a single way to pitch Facebook to uninformed investors it would be this: “Facebook is the next Google”. All signals suggest that this will be the case including a large influx of Google employees to Facebook. With this in mind, the average investor will look at Google’s history and recognize that the company’s market cap has essentially maxed out at $200 billion over the past few years. That’s with a $28 billion revenue stream, more than 10 times the size of Facebook.

“But Facebook’s an explosive company that’s poised to dominate the internet!”, I hear Facebook fans (and shareholders) saying. I couldn’t agree more. However Facebook is now in the unenviable position of trying to grow more than three Yahoo’s in revenue in a couple of years (Yahoo currently generates around $6.8 billion annually).

Best Properties Always Look Expensive Argument

Don Dodge has published an article justifying the valuations of internet companies, including Facebook, as many have claimed we are now in the midst of another internet bubble. If we were to take Don’s article at face value he would be correct: there is still upside potential. However, even if we assume that Facebook will succeed like Google did, there are more important considerations: liquidity, how long Facebook will take to reach their expected revenues, and what investment alternatives exist.

Greater Liquidity In Public Markets

On November 10th I purchased shares of Sandisk at $40.20 and today the stock sits at around $50, which effectively represents a 25 percent gain. I could sell those shares today at any point during the day, take my cash and move on with my life. Facebook’s stock has surged in the same time frame however selling the stock isn’t as easy. As such, most investors are expecting to go public. While the latest legal analysis I’ve read of SEC regulations suggest that Facebook may be forced to go public by May of next year, or at least begin reporting the company’s income, it’s well known that Mark Zuckerberg would like to wait as long as possible to go public.

With that fact in mind, investors purchasing Facebook shares should hope that the company is forced to go public in order to generate a liquidity event. Otherwise, I’d stick to investing in publicly traded companies.

Great Cocktail Fodder

Granted, many extremely wealthy individuals would love the opportunity to throw $1 million or more into Facebook just to say they own shares of the company while at cocktail parties with their other wealthy friends. From that stand point, Facebook is an excellent investment. For that reason, we suggest that any of our uber wealthy readers build up their Facebook stock because they’ll be the envy at all their cocktail parties. However if you aren’t among the most wealthy individuals in the world, you’re much better off investing in more traditional investment vehicles.