Speculating with Facebook

Enrique Dans. Professor. IE Business School

14 June 2011

The spectacular valuations of social networks bear a striking resemblance to what happened during the dotcom bubble, including some of the key players.

What makes a company like Goldman Sachs value Facebook at the spectacular figure of €50 billion? Along with a number of investors who confirmed said valuation by investing no less than $2 million in shares they won’t be able to sell until 2013? Are we facing another edition of the fearsome bubble we experienced at the beginning of the century?

Indeed, what we are seeing today has many things in common with what we saw then. It even features the same key players: the same investment bank which, together with others, started the bubble by transferring the phenomenon of companies that began their activities on the Internet from specialised venture capital investors to more general investors. Together with the "report-sellers", who depend on their reports being spectacular to make their sales, they gave rise to that spectacular phenomenon of overheating referred to by Alan Greenspan as "irrational exuberance".

Is Facebook worth 50 billion? After the bubble, the evolution of Internet companies has been very conservative. Careful salaries, valuations that could be accepted by traditional metrics, restricted costs, etc. Now, he who brings euphoria is he who makes most money with it: the same people who did it in 1999, with the same arguments, i.e. people who sell picks and shovels at the height of the gold rush.

Facebook is a brilliant enterprise. It is profitable, it is growing fast and it is redefining a new activity ecosystem that is undoubtedly worth a lot of money. But valuations must be based on results and now that we have comparable companies, 50 billion require multipliers that simply do not make sense. The fact that someone will pay an amount for a percentage does not necessarily mean that the proportion should be applied generally to the total. Facebook is not a bubble: it is a company with a good business model that will not collapse tomorrow or the day after. But please, let´s keep our feet on the ground.

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