Another way to look at the Facebook debacle is to look at the user base. Let's assume, for the moment that they actually have a Billion active users (which even they don't claim, but rather 900 Million). And let's assume that they are all active users who click on the sidebar ads and make money for Facebook.
Each user is worth about $100 to Facebook, if you take the vaunted Market Cap and divide by the number of users. In effect, you can divide the company up into a Billion subdivisions, one of which has your name on it. Your market cap is $100.
For that $100 Facebook invested in you, how does Facebook make money? Well, you click on ads and advertisers pay them. But, in order to have any kind of rational rate of return, how many ads would you have to click on?
Say we want an annual rate of return of 5%, which would give us a P/E ratio of 20. You'd have to click on $5 of sidebar ads every year, to make this worthwhile.
"But wait!" you say, "I never click on those stupid ads!"
Good for you. Neither do I. No one should - most are for ripoffs or cons.
But apparently about 4-5% of Facebook users do, which is touted as being twice the industry norm. And each click generates maybe a penny in income. So, in order for Facebook to make money from you, you'd have to click on about 500 ads per year. Or they would have to charge more than a few pennies per ad.
They also snag about 30% of Znyga's revenues, which they did last year, basically put a gun to their head and threatening to kill off Farmville, or else. Znyga capitulated early, folding like a cheap umbrella. They are trying to develop new games on independent platforms. However, it appears that the "-ville" craze has died off in favor of Angry Birds or whatnot.
Of course, another way they make money is in selling your preference data - your likes and keywords, so that marketers can target ads to you. But are people willing to pay a lot of money for this? And will people catch on to the fact that the whole gig is just a chance to sell you, like a whore, to advertisers?
MySpace died off rapidly, after a few ham-handed attempts at marketing like this, including making you have a mandatory friend named "Tom" who would post on your wall, whether you wanted him to or not, about the latest hot bands and great bargains. It was so poorly done and so transparently commercial, that people fled in droves. I actually contacted the customer service rep on MySpace at the time and asked how I could "unfriend" Tom. At the time they said you couldn't. A year later, when I logged in again (I am one of those "active users" they count) he was mysteriously gone.
So you see, the numbers are stacked against a Facebook Market Cap of $100 Billion. To justify such a value, the company would have to generate about $5 per year per user, and that would be assuming that each user was an active user, and assuming they have 100 million more users than I used in my hypothetical.
Of course, they could charge people $5 to use Facebook. But I suspect a lot of accounts would end up being closed, if that happened. Recent experiments have been made in charging people to use Facebook, called "prominent posts" seem like an experiment in this area. Only hard-core Facebookers (as they call themselves) would consider paying to post something. And your friends would all know you paid to make your pose "prominent" and that could backfire in a big way.
So how much does Facebook actually make? According to NASDAQ, about 31 cents a share, with 2.14 Billion shares outstanding. This means an annual revenue of about $664,400,000, which some analysts say will drop dramatically in the second quarter and the rest of the year (which they told their big clients, but not you and me, just before the IPO).
At $32 a share, you are "worth" about three shares to Facebook, which means the actual revenue of Facebook is under a dollar a person, per year. A lot of money, to be sure, when you multiply it all out.. But not enough to warrant a stock price of $32 a share.
In other words, we come back to the sad conclusion that Facebook is overvalued by a factor of five at its current profit levels. If income drops, as forecast, it could go even lower.
No matter how you slice it, this is an overvalued deal. Perhaps not as bad as Linked-In, but bad.