Original URL: http://www.theregister.co.uk/2011/06/16/facebook_ipo/

Facebook's mega-billion-dollar bubble ... will it float?

Only time will tell if stalker book valuation is valid

By Tim Worstall

Posted in Financial News, 16th June 2011 11:02 GMT

So just how much is Facebook going to be worth by the time it eventually IPOs? Given that prediction, especially about the future, is very difficult, who knows?

If we take recent movements we can still come up with any number we like:

"As for the valuation spurts, Facebook was said to be worth $23bn in June 2010, nearly as much as UK retail monster Tesco at $50bn in January this year, and was then plumped up to a $60bn golden goose in February," noted The Register's Kelly Fiveash earlier this week.

Add $10bn a month for a year and we're racing through $170bn in January 2012. Add 20 per cent a month and Facebook becomes one of the most valuable companies in the world at $450bn and rising. Clearly ridiculous, as Felix Salmon has been pointing out for some time now.

Think back to the dot com boom and yes, there was indeed a Google that came out of it. As well as an Amazon, eBay, Pets.com, Webvan and numerous other now happily forgotten names. For this is what bubbles do: produce a plethora of wannabes before the rather brutal culling down to that femtopercentage that weren't complete lunacy in the first place. Salmon makes the point that yes, we do want to value all those wanna- and would-bes as if one or two of them was going to become a Google or an Amazon – but we really don't want to be valuing all of them as if all them them are going to be.

Which is why there are more than a few raised eyebrows out there about Pandora's recent IPO. A couple of $ billion for an internet radio station? OK, sure, people will like to listen to music, sure, advertising spots and rates could rise but, umm, where's the lock-in? There's not even an obvious set of economies of scale: Pandora's major cost is royalties and those get charged not per-play but per-person-per-play.

Is LinkedIn really worth whatever vast number of spondoolies the market says it is today? Well, yes, of course, because things in markets are worth what markets say they are worth, but beyond that? There are mutterings that they might be able to use that network (for they do at least have a network effect working for them) to get into the recruitment business but it's a lot to be valuing a possibility at.

Groupon*, the "fastest growing company in the history of capitalism", is internally valued at $30bn last I saw. More by the time it IPOs, obviously: but is flogging coupons really, even at 50 per cent margins, going to remain a high growth high margin business? It's not even that this is a new business: margins didn't stay high in newspaper coupons even back when they really were delivered to every home in the country.

It's a fair old bet that at least some of this is going to end in tears: unfortunately, knowing which bit is going to be a little more difficult.

But then that is the way with booms and bubbles in investment markets and one of the reasons given at times as to why markets are so bad at allocating investment. We've centuries of evidence to look at: not just the dot bomb that most (Many? Some? Just how old are you guys anyway?) here will remember from personal experience but secondary banking before that, car companies before that, railways, canals and all the way back to Thales cornering the olive presses in Miletus. Huge over-investment, precious capital sprayed all around at anyone with a half-plausible idea and most of it wasted. Surely it would be better for such things to be planned, for the wise bureaucrat to organise this for us?

That has also been tried and strangely the results seem not to be as good as those from these splurges. Yes, fortunes were lost building the canals, most of the railway companies went bust at one time or another. Dotcommery brought us such delights as Global Crossing (just, finally, RIP'd) which was going to build a whole new fibre-optic backbone. But here's the thing. The investors in all of those projects lost most/all their money. Capital was undoubtedly wasted. If it had all been spent sensibly we probably would now be better off.

Yet define "sensibly" before we know what we're going to do with the infrastructure that results? The railways really started as a way to get coal to people (it's one of the defining characteristics of the English railways boom, that delivered coal prices slumped along each newly completed line) but much to the capitalists' surprise they really made their money by providing cheap transport to the working man. The railways were the reason for the invention of the day trip and commuting. Before the building of the lines, no one had any clue that this was where the money was going to be. Indeed, it took some of them a couple of decades (and a bankruptcy or two) before they got it.

Global Crossing was a disaster for anyone who put money into it and held on: yet the growth of things like YouTube (for whatever benefit that might have, little perhaps) was in part based upon all those thousands of miles of dark or light but hardly used fibre that had been laid in that orgy of let's piss away the shareholders' money.

And that's the little secret about infrastructure that is so little understood. It is not true that having infrastructure makes us or the society richer. It is rather that using it does. And we usually don't know how to use it until someone has gone and built a lot of it, people do that curious shaved monkey thing of experimenting with it and then we all find out. This is true of most inventions: it has been said that the biggest social change that the Model T brought was that women were less likely to be virgins at marriage. People worked out what to use the back seats for pretty quickly. The bicycle has been called the greatest contribution to the health of the working classes ever: it allowed courting outside the home village for the first time (amazing how inventions and sex seem to go together, eh? The first social network, Friends Reunited, is said to have caused a bubble in the divorce rate) to the benefit of the next generations' genes.

So these bubbles, they're not all bad. They provide an excess of whatever it is, which we then play with until we've worked out what to do with it. What we do with it is what allows the advance in wealth, even if those who built it for us have gone bust.

Back to Facebook though, and those projections of its future worth. One story says that in the rich world Facebook's number-growth has stopped, even gone into reverse. Hot growth stocks that aren't growing tend to be valued, as ex-hot growth stocks, not all that highly. And there's even a law change possible in the US that means that Facebook won't have to go public at all.

All of which means that not only do I not know what Facebook will be worth at IPO, I don't even know whether there will be a Facebook IPO. Which is exactly what your stockbroker will tell you (only more expensively). ®

* My own complaint about Groupon is that they refuse to sell my cheap golf coupons but that's another matter.