‘If Facebook’s Profit Model Stays the Same, This Valuation Doesn’t Make Any Sense’ –Espen Roback, Pluris, in The Atlantic
The most highly anticipated IPO in history didn’t put on much of a show. Facebook closed today within decimal points of its opening price of $38. Even so, the company’s market cap is higher than McDonald’s or Pepsico.
Espen Robak is the president of Pluris Valuation Advisors, where he studies and values private companies trading on the secondary market. Derek Thompson at The Atlantic talked to him this morning right as Facebook trading began. Â
One of Robak’s first points was “The people who bought in the secondary market came in right around $44. Those shares are locked for 180 days.Â So you’ve got to think those people thought the shares were worth in the $50s and $60s at least” . . . which he elaborates on further in the full interview. Â You can read itÂ here. Â An excerpt:Â
ROBAK: It might seem insane. But it’s not insane if you think about the reach of the company as a web property. From that standard, it’s already bigger than Google. Nobody knows what Facebook’s revenue and profit model is going to be. If their revenue and profit model stays the same, this valuation doesn’t make any sense. There’s no way they can just squeeze enough plain old ad revenue to justify these numbers. They must change. We don’t know what this is going to look.
THOMPSON: I find that a remarkable statement: “If their revenue and profit model stays the same, this valuation doesn’t make any sense.”It means investors are spending millions of dollars in the hope that Zuckerberg will pull a rabbit out of his hat.
ROBAK: Think of it this way.. Google has a pretty standard price-earnings ratio right now — around 15 to 20. That’s where Facebook will ultimately have to get. They need vastly larger profit. How many more ads can they sell? Four times more in the next year? I don’t think so. They have to get revenues from somewhere else.
THOMPSON: Where will Facebook get that money?
ROBAK:I think the media has gotten this part right. All the data that Facebook is gathering about us will become valuable at some point. Right now, Google can charge so much more for their advertising because they know what you’re searching for, what you want to click. Facebook can take all of this stuff you write about and turn it into metrics about what you want to buy. I can’t tell you how, but I think that’s the idea.
Espen Robak, CFA, President, Pluris Valuation Advisors
But wait! Â There’s more craziness!Â
The Wall Street Journal’s MarketBeat blog reports that while you and Iâ€”well, not actually us, but possibly you, or maybe someone you knowâ€”might have been willing to pay close to $40 per share for Facebook today, there’s at least one individual investor out there who loves Facebook one hundred times more than any of us can imagine:
Our colleague Jacob Bunge filed the following field report. This is not a typo:
[pullquote]Facebook stock for trading…rise as high as $4,000[/pullquote]
Knight Capital Group, one of the biggest aggregators of US retail share trading, is seeing orders for Facebook come in from brokerage firm clients â€” including one from an investor willing to buy the stock even if it rises as high as $4,000, according to managing director Steve Kay. Orders like this is one of the reasons Nasdaq will wait until 11 a.m. or later to release Facebook stock for trading â€” the exchange and bank underwriters will wait until itâ€™s clear that there is enough selling interest so that the stock doesnâ€™t shoot to head-spinning levels straight away.
The quoting period could be extended as the underwriters match up buying and selling interest to determine the correct price at which Facebook will first change hands.
To be clear, this is a limit order, meaning somebodyâ€™s willing to go that high. Why you would want to go that high is beyond the ken of most normal people. But this is not a normal day.
And for those of us who are cynics, Total Return, the Journal’s Personal Finance blog, helped with the pastime of Â
1. Borowitz Report:Â A Letter From Mark Zuckerberg
3. Jest.com:Â Inside the Facebook IPO
5.Â The Facebook IPO
Well, YOU Never Had That Much Money in Your ’20s!