A Case Of "Google Envy"

The Facebook phenomenon reaches a whole new level of hype today as public trading on the NASDAQ exchange begins.  Facebook has priced its IPO at $38 per share…the high end of its expected range of $34-$38.  The IPO values the company at $104 billion; more than corporate icons like Amazon.com, McDonalds and Disney.  It is the third highest valued company to ever go public, falling between power company Enel and General Motors.  The largest US IPO was Visa, which raised $17.86 billion in 2008.  Facebook’s early investors could take in as much as $18 billion.

While there is no question that Facebook is one of the great American success stories of all time, the valuation of the company leaves many experts scratching their heads.  Although the company has changed the course of social media and boasts over 800 million users; many financial experts believe that the cost is too high for a relatively unproven company.  Last year, the company earned a $668 million profit on $3.7 billion in revenue.  If shares trade at $38, Facebook would be valued at more than 80 times it annual earnings compared with the 13 times earnings average of the S&P 500.

Many analysts believe the risk is too great and the valuation too high.  After all Facebook is a company that doesn’t make anything.  While the company has a vast number of active users, there are serious questions regarding the effectiveness of reaching those users through advertising.  GM recently pulled $10 million in ads stating that the ads failed to impact customers’ purchases.  Many view the company as little more than a platform where people can chat and post pictures of animals wearing hats…a platform that they expect will soon be surpassed given the rapid advance of technology.  Remember MySpace?

So why is there all this hype over a company that most seasoned investors view as an unproven and overpriced risk?

The answer is “Google Envy.”  Many investors see a similarity between Facebook and Google.  Those that missed the early boat on Google don’t want to be left waiting at the dock again when Facebook shoves off.  Google went public in 2004 at $85 per share.  As we write this Google is listed at $624.09 per share.  For investors to obtain the same return on investment with Facebook that they did with Google; Facebook would have to reach a valuation of approximately $1 trillion.

For Facebook to reach anywhere near those heights they are going to have to find a way allow advertisers to effectively reach their growing bank of users.  On the front burner is finding a way to post ads onto mobile devices…like iphones and ipads.  While that may appease prospective advertisers it is just a likely to infuriate mobile users who don’t want to see ads popping up at every turn.

Facebook, once but a dream concocted in a college dorm room, is now one of the highest valued companies in history.  Its founder, a 28 year old wunderkind, by day’s end will be one of the richest men on the globe.  Will this amazing story continue or will it be the tale of just another dot.com bust?

Google…or MySpace!