"A million dollars isn't cool. You know what's cool? A billion dollars," says Sean Parker in a pivotal scene from the critically acclaimed "The Social Network," a film adaptation of the drama surrounding the founding of Facebook.
And cooler still is Facebook today. The investment bank Goldman Sachs, along with the Russian group Digital Sky Technologies, has invested a total of $500 million in the social network, giving it a breathtaking value of $50 billion. Despite concern about potential regulatory roadblocks from the U.S. Securities and Exchange Commission, investors have been tripping over each other for the chance to invest in Facebook, with reportedly more than $7 billion in orders. All in all, the social networking giant has raised a cumulative $1.5 billion in financing.
This was just another piece of headline news for Facebook, which seems to be constantly at the center of attention. It should come as no surprise that Time Magazine named Mark Zuckerberg its Person of the Year in 2010. Now the CEO and president of the largest social networking website in the world, boasting 500 million users, Zuckerberg became the youngest self-made billionaire ever in 2008, at the age of 23. His quarter ownership of the company translates into a worth of more than $12.5 billion. To put this into perspective, he is now worth twice as much as fellow technology heavyweight Steve Jobs.
As Facebook gains both fame and worth, however, skeptics are starting to emerge. Yes, the site has overtaken Google to become the most popular website in the United States, and the company is currently worth more than established media giants like News Corporation and Time Warner, with a reported $2 billion in revenue. This price-to-revenue ratio of 25 times is an impressive figure by any standard - if Wal-Mart traded at a similar rate, it would be worth $10 trillion, 50 times its current worth. An intrinsic reason helps explain the difference: As a web-based company, it costs far less for Facebook to scale its business because it only has to add more servers to support the increased user base and traffic. For Wal-Mart to expand, though, the company must spend large amounts of money to buy land, build new stores, hire personnel and establish new supply chains.
But the burning question is how much of a difference that should account for. On the other hand, Google, a more appropriate business model to use for comparison, is valued at six times its annual revenues. Critics also have noted that although the majority of revenues for both companies come from advertising, a high portion of Google searches were pre-commercial transactions. Contrast that with Facebook's advertising revenues, which come from generic online advertising, generally considered less profitable. Even by the lofty valuations of the technology sector, Facebook's rates stand out as unusually high.
Meanwhile, Facebook's successes have translated into a wider - and possibly irrational - exuberance for the technology sector as a whole. As many investors await the highly speculated initial public offering of Facebook, other tech companies have either already gone public or begun preparing for IPOs themselves. In 2010, 51 companies in the tech sector went public, resulting in the sector's best performance in five years and accounting for nearly one-third of total IPO activity. Big names such as Skype and Demand Media are slated to go public in 2011, with LinkedIn and Pandora expected to file this year. Last year, Groupon was approached by Google with an offer that valued the company at $6 billion. In the secondary market, Twitter increased four-fold during the year and is now worth $3.7 billion. Going forward, companies likely will seek to obtain higher valuations by pointing to these examples.
All this brings back memories of the dot-com bubble a decade ago. Those were the days when the price-to-earnings ratios of stocks in the NASDAQ index were greater than 100. Amazon was valued at greater than the market valuations of all publicly traded bookstore companies, including Barnes & Noble and Borders combined. In fact, during the bubble, people sought after Internet companies so much that companies changed their names to sound like they had a web-presence.
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