Rumours are swirling rapidly in the news that Facebook is aiming for an $100-billion-valuation IPO sometime later this year or at the start of 2012.
$100 billion? Really? Here’s four reasons why that valuation, at this point in time, is utterly ridiculous.
1. Crunching the numbers.
In 2010, Facebook earned roughly $2 billion in revenue, with about a quarter of that being profit. With an income of $500 million, even a $50 billion valuation would mean it’s worth a staggering 100 times its profit. Which, of course, is insane.
Facebook would need to continue growing its users and revenues at an impossible rate to make up for this metric, never mind the 200-times that a $100 billion valuation would require. Remember, only so many people live on planet Earth, and only so many will ever be on Facebook. With 10 percent of the world already on it, how much deeper can their penetration really go?
2. Declining users in early adoption regions.
Adding onto the latter point of number one, recent stats show that several countries that were early to jump on the Facebook bandwagon are now falling off.Numbers for active users have declined in Canada, America, the United Kingdom, Norway, and Russia, and that overall growth has slowed significantly from last year.
This should prove that penetration is not only nearing is maximum in many major regions, but that “Facebook Fatigue” is also setting in across numerous demographics.
3. Controversy and concerns.
Since inception, Facebook has been plagued by serious concerns over its ability to maintain its users’ personal information and protect the wealth of private data it has accumulated. Its mediocre reputation on this front has been a stain the company has failed to clean all this time.
If something akin to Sony’s PS Network hacking debacle occurred to Facebook, it could be crippling, and the fact that they have never got out of their way to thoroughly address this ongoing issue will remain a legitimate concern both to users and investors.
4. Nobody but Facebook thinks Facebook is worth this.
For the past three years, ever since the earliest talk of an IPO and talks of company valuation, critics have denounced Facebook’s worth. Of course, it’s worth has risen tremendously over the past years, but its growth trajectory has somehow become irrationally exponential and certainly impossible to maintain.
Facebook has arguably left its growth phase already and should theoretically debut on the stock market as something more mature, more like a value stock or with a dividend—but at $100 billion, Facebook as a growth stock would be a terrible gamble, and as a value pick, even worse (“I’m sorry, your P/E ratio is what?!”). Even in 2011, skeptics have come out to say Facebook isn’t worth more than $10 billion—based on real numbers, not false hype.
Don’t get me wrong here though: Facebook may indeed—one day—be worth $100 billion (which would make it one of the largest technology companies the world has ever seen).
But that day is simply not today.