Monday, January 03, 2011

Ripple Effects of Goldman's Facebook Deal

By Eric Jackson
RealMoney Contributor

1/3/2011 5:00 PM EST
Click here for more stories by Eric Jackson

The investment world is abuzz today with news that Goldman Sachs (GS - commentary - Trade Now) has made a $450 million investment in the popular social networking site Facebook, a deal that values Facebook at $50 billion. A few weeks ago, Facebook's private shares were reported to be trading on market exchanges such as SecondMarket and SharesPost at levels that valued Facebook at $56 billion. Some people didn't believe it -- or else they were on Christmas break and didn't pay attention. Several pundits said that a $56 billion valuation for the company wasn't real because Facebook wasn't trading publicly. "Wait until it goes public and there's real liquidity," the critics said.

After last night's news, those critics are going to have to face facts: Facebook's valuation is real, and Goldman's investment last night means that valuation will likely double in the next 12 months, whether or not there is a Facebook IPO. According to the New York Times article, Goldman is "considered one of Wall Street's savviest investors," so the value must be real! In all seriousness, though, Facebook's value is real, and people are just going to have to deal with it. Just because it's private and fairly new, the terminal value of the company is rich.

Facebook is reported to have $2 billion in revenue this year. Google (GOOG -commentary - Trade Now) had $27 billion in revenue for the last 12 months. On the surface, it appears way out of whack that Facebook should have a valuation that's one-quarter Google's (which is just under $200 billion). The market must be wrong, some assume.

Obviously though, the market believes that Facebook will grow at a much faster pace than Google over the next five years. The market believes that in five years, Facebook's revenue will be much bigger than $2 billon a year.

This argument has been going on for some time, between the value investors who complain about a highflying stock with piddly revenue and profits, and the growth investors who argue that you need to look ahead. Amazon (AMZN - commentary - Trade Now) was the subject of such an argument for 10 years. It's clear now that the growth investors won that one. Just this morning, Morgan Stanley raised its price target on Amazon to $225 because it believes its revenue will triple from here by 2015. Amazon has gone up only 180x since its IPO close.


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