Expert casts doubt on value of Facebook shares

By Sooraj Shah
04 May 2012 View Comments
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Financial experts fear Facebook's shares are massively overvalued when compared to the company's revenue

The social network's initial public offering (IPO) values it as between $85bn (£52bn) and $95 (£59bn), more than Google's total worth of $23bn (£14bn) when it floated in in 2004, although the search engine giant is now valued at $200bn (£124bn).

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Other recent internet companies to have launched their own IPOs are social gaming outfit Zynga, and discount coupon firm Groupon.  They raised $1bn (£618m) and $805m (£498m) respectively in late 2011, but now both trade well below those figures.

Experts fear that Facebook's stock could go the same way, given that its proposed valuation is 99 times its earnings.

"It's really, really expensive," said Bob Rice, managing partner at Tangent Capital Partners LLC, on Bloomberg Television.

"It's very hard for me to get my arms around a valuation of 80, 90 billion dollars for a company that did a couple of hundred million dollars of profit in the quarter."

Rice also cast doubt on Facebook's potential for revenue growth.

"When you look at what Facebook can charge for an online ad, it's about half of the industry average, so you have to wonder where any revenue growth is going to come from."

Facebook could start trading its shares on 18 May, when it's expected to trade under the initials ‘FB'.

Last month, the social networking site purchased mobile photo-sharing app Instagram in a $1bn (£630m) cash and stocks deal.

In an open letter from Mark Zuckerberg, published in The Wall Street Journal, the Facebook owner insisted that the company wanted to make more money to build better services and create the most value for its shareholders and partners over the long term.

"We're going public for our employees and our investors. We made a commitment to them when we gave them equity that we'd work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment.

"As we become a public company, we're making a similar commitment to our new investors and we will work just as hard to fulfil it," the letter reads.

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