One of the stories circulating today and getting lots of play is this commotion over a $500 million investment in Facebook by Goldman Sachs and Russia’s Digital Sky Technologies — an investment which has been extrapolated out to give Facebook a valuation of $50 billion.
“The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner,” states NYT’s DealBook.
Maybe so, and certainly makes for great headlines, but strikes us as if they’re jumping the gun. And by the way, that number isn’t new. There’s been a few investors buying Facebook stakes lately that have then been gauged for determining a value for the entire company. TechCrunch in late November trumpeted the $50 billion number, based on secondary market transactions.
Perhaps I’m missing something, but it seems presumptuous and a bit simplistic.
We’ll acknowledge that in the most basic sense Facebook is worth whatever someone is willing to pay for it, and if $500 million gets you 10% of the company, then boom — there’s your $50 billion.
But it’s a bit more tricky than that, isn’t it? The price you pay for a 10% stake isn’t necessarily what you’d pay for the whole kit and kaboodle. Facebook is a private company with limited and highly sought-after shares. Those “pieces” of the company carry a high value, thanks mainly to their scarcity. That doesn’t seem to be a very objective measure of the company’s value.
Say 100 highly coveted paintings by a single artist go on auction all at once instead of just ten. Will each painting fetch the same high prices that they otherwise might if sold in a just a small lot? Don’t know for sure, but simple supply and demand suggests there’s a good chance they won’t.
Let’s see Facebook’s financial statements and a much bigger, easily accessible supply of stock before we decide its valuation is bigger than eBay’s. Maybe it’s worth $100 billion, or $500 billion, for that matter. But let’s allow the market to make that determination instead of hyperventilating media.