I was intrigued with the news that Facebook has valued and bought a company at a $1bn valuation when it has only 13 staff and never made a profit. For those of you who have never used Instagram, like me, the value in their business seems extraordinary and brings back memories of a technology bubble. The fact that an app which allows you to manipulate and share photos can have such a valuation just shows how confident the market is.
However delve a little deeper and maybe the value Facebook put on them is quite understandable, even if the technology is not unique or can be relatively easily replicated. Because when you are a business that is about to float against a backdrop of huge media hype for an estimated value of $100bn, $1bn seems like small change. Especially when Instagram was signing millions of new users to their already significant base of 27 million users, it looked for a moment at least that this company was the new darling of the internet. A position Facebook was obviously keen to protect and ensure maximum value of their IPO.
It is an expensive exercise acquiring businesses to stay at the forefront but hopefully Facebook have done enough to be able to float at a stable price and not just a short term boost. Interesting times.
The bigger question, for me at least, is whether or not Facebook itself is actually worth $100bn in the first place. Most of their “users” (rather than customers) don’t pay for the service and advertising wouldn’t turn such a value. Of course you have the profit shares from commercial gains elsewhere, such as via Zynga’s FB games and related income, but by my guess that still only gives them a realistic value of under $20bn. Everything above is grossly inflated.
There’s no doubt that Facebook is a hugely valuable commodity but outside of the western world its influence begins to diminish, with many other country’s already gaining their own alternatives that seem to be cannibalising from FB’s users. Certainly as an investor myself (not in FB but generally) I wouldn’t put my money near FB, the risks from such an inflated value, especially during these hard times, are a bridge too far and borderline dangerous.
Good point Mark – to be honest anywhere Goldman Sachs are involved I would be concerned about my investment. But as you say it doesn’t take much to realise that FB isn’t worth their expected valuation even if their hype keeps it there for a while.