Goldman Sachs invests in Facebook at $50 Billion valuation

At this valuation, I want to put money into SecondMarket stock, not Facebook.

Facebook is a great company, with tremendous prospects. Its growth curve is going to slow significantly, however.

The SEC may catch up with SecondMarket and plug the leak at any time and possibly quite soon.

If $US 810^8 (from http://economictimes.indiatimes.com/infotech/internet/Facebo...) is a good estimate of Facebook's revenue, then, assuming fairly stable advertising income (a reasonable assumption, as Facebook has a market share nearing saturation, and the market in social networking is mainstream enough that it probably won't grow too much), a valuation of $US510^10 is 62.5 years of growth. Facebook's brand has a lot of valuable goodwill, but they are still vulnerable to competition, and might not last 62.5 years - so the valuation seems way too high.

Is that reasonable? Suppose that Facebook eventually needs to settle at a P/E of 10:1. Then it needs $5B/year of profits. If Facebook is like Microsoft in that it can maintain a high profit margin due to continuing to successfully exclude any competitors from its market, just as it has so far (in Microsoft's case, through a combination of government-granted monopolies, criminality, and consistently not fucking up; in Facebook's case, perhaps not) then it could have profits like that with as little as $6B/year or so of revenue. Presumably, within a couple of years, the majority of the internet's users will be Facebook users, which is something like two or three billion people.

Is it reasonable to expect Facebook to extract US$2 to US$3 per year per user? It's hard for me to imagine how they could fail to extract several times that. If nothing else, the blackmail value of the data they already have on hand ought to be larger than that. ("Upgrade to Facebook Premium today in order to have the option to keep your past private messages from being visible to all your Facebook friends!" But it probably wouldn't be done in such a public way, in order to dampen backlash.) They can probably also sell preprocessed datasets of people who read subversive literature online to national intelligence agencies: not just the US and UK, but also Egypt, China, Pakistan, Syria, Italy, and Russia. If laundered through some kind of data broker, they could even get plausible deniability.

That would be out of keeping with the kind of privacy invasion Facebook is currently well-known for, though, so it probably wouldn't happen without a change of control of the company first.

So the mere $50B valuation represents an assessment that Facebook's popularity could be short-lived, or that it could become subject to much more intense competition than it is today, driving its revenues down toward their costs.

I hope to God that Goldman is right.