Goldman hypes Facebook in shadow stock market

Can Facebook Inc, that monument to wasted time, really be worth $50bn, asks David Pauly
Goldman hypes Facebook in shadow stock market
Mark Zuckerberg, founder of Facebook, last week said that in the first nine months of 2010, the site earned $355m on sales of $1.2bn
By Bloomberg
Mon 10 Jan 2011 06:52 PM

Can
Facebook Inc, that monument to wasted time, really be worth $50bn?

We’ll
have to take Goldman Sachs Group Inc’s word for it. There are no public audited
numbers for Facebook to back up the bank’s estimate of the company’s value.

News
has leaked out that Goldman, supposedly the smartest Wall Street firm, will buy
$450m of stock in closely held Facebook, with Digital Sky Technologies, which
invests in start- ups and is partly owned by Goldman, purchasing another $50m.

The
anonymous folks who put out these numbers said the deal sets a value for
Facebook equal to that of Boeing Co and approaching that of Home Depot Inc.

Goldman
clearly is capitalising on Wall Street’s latest diversion: a semi-public stock
market for private companies.

Several
firms now offer shares of closely held companies or offer estimates of their
value, or both.

Featured
in this new market are Facebook, where users share private information and
photos among themselves; Twitter Inc, where you can follow your favourite
celebrities as they desecrate the language; and Groupon Inc, an electronic
coupon-clipper.

All
this fuss fires up the market for initial public offerings of these companies
well in advance of any actual sales.

Putting
a sky-high but hard to verify value on Facebook will likely boost the value of
the shares Goldman is buying even higher on the shadow market and touch off
extraordinary gains when Facebook’s 26-year-old chief Mark Zuckerberg finally
decides to do an IPO. Late last week, Facebook said it would start reporting
financial information in April 2012, a prelude to going public.

There’s
another lucrative piece of the current deal for Goldman Sachs. It plans to sell
an additional $1.5bn in Facebook shares to its partners and wealthy clients.

Goldman
will take a four percent placement fee for selling the shares, five percent of
any gain in the stock and an annual servicing fee, according to two clients who
have been offered shares.

Goldman’s
investment in Facebook also should give the firm an inside track as the
underwriter whenever the social networking company goes public.

A
successful Facebook IPO is almost certain. Its Internet site got more hits in
the January-November period last year than Google Inc’s main site, according to
New York-based tracker Experian Hitwise.

Facebook
says it has more than 500 million users. The company last week said that in the
first nine months of 2010 it earned $355m on sales of $1.2bn. Founder
Zuckerberg has become a celebrity, recently giving $100m to the schools in Newark,
New Jersey.

While
Facebook looks more like a Google, which went public in 2004 and has climbed
since, it’s being insanely overvalued as were dot-com disasters like EToys Inc
and Webvan Group Inc.

If
you believe the company is worth $50bn, take another leap. Using Facebook’s
numbers from last week - the best we have in the absence of complete financial
reporting - we might guess it made about $500m for the year. That would mean
its shadow market value was about 100 times its earnings. Google’s price-earnings
ratio is 25.

Investors
with short memories will pay whatever the shadow market and Goldman Sachs, the
prospective underwriter, say they should.

Back
in 2000, Cisco Systems Inc, then already the dominant company in computer
network gear, had a P/E approaching 200. It’s now 15.

There’s
another even more down-to-earth problem for the company. Facebook is now seen
by analysts as a threat to Google as a gatherer of ad revenue. Who’s to say a
few years from now another startup won’t pose a similar threat to Facebook?

(David
Pauly is a columnist for Bloomberg News. Opinions expressed are his.)

 

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