Facebook’s Valuation : This week marks the six year anniversary of the bull market in US stocks and six months since Facebook passed $200 Billion in market capitalization. While the Nasdaq has increased in value a little bit over three times during these six years, Facebook capitalization has gone up some twenty times over the same time period. Although not publicly listed until May 2012, its value in Spring 2009 was unofficially set around $10 Billion when Digital Sky Technologies bought a 2% stake for $ 200 million. I remember the comments at that time questioning what seemed like such a high valuation and the comparisons being made with MySpace, a failed social network which had been all the rage a few years before.
Despite all the skepticism, Mark Zuckerberg’s company is currently worth more than much older tech giants like IBM or Intel Corporation as well as brand name icons like Coca-Cola or Visa. These companies that have been beaten out in capitalization terms generate much more cash than Facebook does and have a long history of doing so and yet they are not rewarded by investors, who seem to prefer exciting companies.
So where does the excitement come from lately in case of Facebook ? I guess it’s a combination of high earnings growth – mainly from the mobile market – and large acquisitions – like mobile messaging service WhatsApp, Instagram or virtual gaming headset maker Oculus VR – which are expected to pay off big.
If Facebook will continue to defy its skeptics as it has done for at least the past six years, it’s everybody’s guess. For the time being there are I believe three things worth remembering:
1. It is very inspiring that in just eleven years someone in his early twenties could create from scratch a company to rival the biggest listed companies in the USA.
2. You can’t predict the future, even if you think you have all the angles figured out – those who witnessed the failure of MySpace were very quick to point out that Facebook will be just a repetition, but on a grander scale. They have been proven wrong time and time again.
3. Don’t short something you don’t understand just because it seems too pricey. What today is considered ‘extremely’ expensive, might become ‘insanely’ expensive tomorrow. As famous British economist John Maynard Keynes is reputed to have said: ‘Markets can remain irrational longer than you can remain solvent’.