Facebook: Partying Like it is 1999

Thursday, 12 May 2011 08:12 AM

By Jacob Wolinsky

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I recently discussed the danger of investing in companies like Facebook. I wanted to look a bit more into the numbers regarding Facebook.

The hype surrounding the social-networking sites today is almost identical to that of the Internet bubble of 1999. Facebook, the most popular social-networking site today, was recently valued at more than $100 billion according to The Wall Street Journal.

In 2006, Yahoo offered to buy Facebook for close to $1 billion.

Only four months ago, Facebook was valued at $50 billion. What caused the valuation to double in only four months, and to increase one hundred fold in five years?

Facebook’s revenue or earnings did not double in the past four months, nor did they increase one hundred fold in the past five years. The increase in valuation is due to the hype surrounding Facebook’s future growth prospects.

Right now, according to The Wall Street Journal, Facebook is valued at around 50 times earnings before interest, taxes, depreciation, and amortization, known on Wall Street as EBITDA. Compare that to a company like Intel, which is trading at approximately six times EBITDA.

This means that if you invested in Facebook, it would take 50 years for you to make back your money. And that is before the company pays any interest on debt or taxes.

What makes this more insane is that almost no one has access to Facebook’s financial statements, since it is a private company. Tens of billions of dollars have poured in from all over the world into an investment, where there is no knowledge of what is going on.

Intel, on the other hand, has to file financial statements with the SEC on a quarterly basis, and anyone can look up on the Internet to find out how much it is earning, how much cash the company has, how much debt it holds, etc.

Buying shares of Facebook seems more like playing the lottery with $100 billion than investing.

What makes this scarier is that according to recent reports, insiders are trying to sell out of the company now. It should always raise a big red flag for investors, when the people who really know what is going on (the insiders) are selling.

So why are investors (or speculators) pouring money into companies like Facebook? Investors are excited about Facebook because it is now the competing with Google as the largest site on the Internet.

Social networking is the hot craze nowadays, and Facebook is by far the leader of the pack.

From discussions with numerous colleagues and friends of all varying ages, races, religions, etc., it seems that almost no one even pays attention to the ads on Facebook.

Moreover, there is no concept of brand-loyalty when it comes to websites, which means there is lack of stability in that industry.

Myspace was one of the hottest sites only a few years ago, now it has been left in the dust behind Facebook.

Investors looking at investing in companies like Facebook should remember the darling stocks of 1999 like Lycos, AOL and almost anything that ended with .com.

Those stories did not have a happy ending and this one likely will not either.

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