Perry Glasser

Valuing Facebook and LinkedIn: the Pump and Dump?

In Business, Economics, Economy, Finance, Personal Finance, Wall Street on January 28, 2011 at 1:24 pm

Goldman Sachs neatly side-stepped US regulatory agencies by valuing Facebook at $50 billion but limiting sales to off-shore private capital investors, a valuation of $10 per Facebook user.

SEC?  Never  heard of the bums.

Revenues? Proprietary and secret.

Intended use for investor capital? None of your damned business.

Principles cashing out? Shut your mouth.

Surely Mr. Zuckerberg, who is not yet 30, will spend his next 40 years doing the same thing day in and day out.  How could it become boring?

The Pump and Dump strategy?

1. Accrue or issue billions of shares in a company.

2. Pump the stock with PR releases, mysterious rumors, hints of future growth…anything but genuine business acumen.

3. Dump the stock at premiums on the gullible and faithful. Last seller out the door is broke.

Pump and dump is inhibited by SEC regulations, those pesky bureaucrats who insist that balance sheets be public records, require executives who sign off on those records to attest to their completeness and honesty (that’s the Sarbanes-Oxley Law that Republicans insist is a nuisance), and require certified accountants to attest that the balance sheets adhere to standardized accounting practice.

Executives who ignore these laws do hard jail time. Ask the guys who ran WorldCom or Enron. You’ll have to ask on visiting day.

So excuse us for being skeptical of Goldman-Sachs’s valuation and wondering they are engaged in an end-run around US security laws.

Let’s do some arithmetic.

LinkedIn and Revenue – the Real Deal

LinkedIn will be the first social networking site to go public in the US.  The books on an industry are finally opening. (All data from pages B1-2 of the January 28 Wall Street Journal).

LinkedIn reveals it has 90 million users who for the first 9 months of 2010 generated $161 million in revenue.

Let me save you the arithmetic—figure that’s roughly $200 million annualized (add 33%), or near $2.10 revenues per user.

LinkedIn profit

It costs money to make money. Revenue is not profit. LinkedIn declares net income for those nine months to be a measly $1.85 million, or $.02 per user in three quarters, or $.03 per user per year.

That’s right, a whole three pennies.

LinkedIn is about professional networking, jobs, references and other stuff for grownups. LinkedIn offers services Facebook does not. You cannot find a single time-sucking game on LinkedIn.. No Mafia Wars. Most LinkedIn users come to the site less than once per month, a dismal number for any advertising revenue model.

LinkedIn declares three revenue streams:

  • advertising
  • premium subscriptions, and
  • specialized human resource services that accounted for 41% of company revenues

Dollasr$ Asks: What’s Facebook Worth?

It’s hard to imagine two competitors in the same industry being wildly divergent with revenues. The stocks and fortunes of Royal Canadian Lines and Carnival Cruise Lines sail in tandem. Wells Fargo and Bank of America move, mostly, as one.

But for giggles, blind to Facebook’s revenue streams or plans, let’s worship at the Temple of Wunderkind Zukerberg and triple LinkedIn’s revenue per user. Now apply that number to Facebook.

At $.09 per user in annual profit, Facebook with 500 million users might be earning $45 million in profit.

If Golman-Sachs values Facebook at $50 billion, it’s selling stock with a Price/Earnings ratio of more than 100.

Sure, there will be future growth, and if you care to discount it out, I invite you to do it.

At current valuations, if Mr. Zuckerberg and his company live to be 100 years old, he will have earned back all of what investors have put in. If he doubles growth and revenues above these estimates—a mere 50 years.

And that’s to break even.

Comparisons

Mature businesses show P/E ratios from 8 to 15; riskier companies from 15 to 25; technology grwoth companies can go as high as 30.

 

Market Cap (billions, Jan 28 2011)

P/E (trailing)

LinkedIn ??? ???
Royal Canadian Cruise Lines $10 20
Target Corp $38 12
Facebook $50 100 (calc. user basis)
Boeing Corporation $51 15
General Motors $55 8
Microsoft $240 12

Competitive Environment

If you wanted to go into business against RCL or Target or Boeing, you’d need significant capital outlay because you’ll need more than intellectual assets. Building a crusie ship or a jet takes some doing.

But what will it cost to compete with Facebook? How soon until someone, somewhere, gets a faster, cheaper idea?

Remember when IBM was under attack as a monopoly? Remember when Microsoft was under attack as a monopoly? What did it take for Google to enter the game?

Goldman-Sachs needs a visit to the woodshed.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: