How Forbes Magazine Misinformed Its Readers About Facebook And Cost Them A Fortune

On December 31, 2009 Steven Bertoni of Forbes wrote an article entitled “How Much is Facebook Worth“, where he said “firms are pooling clients’ money to buy privately held Facebook shares — and probably overpaying.”  At the time of this article, the implied valuation of Facebook was around $11 billion according to SecondMarket and SharesPost, which stated that the Facebook stock was trading at $25 per share.

If you are an accredited investor and were a reader of this Forbes article one year ago, this advice, from one of the most credible sources on stock market analysis, may have cost you a lot of money.  However, if you were a reader of SecondShares $50 billion valuation of Facebook just a few months later, you may have been able to save face.

Keep in mind, Forbes Magazine describes itself on its website as “Business News, Financial News, Stock Market Analysis – online source for the latest business and financial news and analysis. Covering personal finance, lifestyle, technology and stock markets”.  It doesn’t state that they cover “secondary private company stocks”.  I feel its a bit irresponsible for a brand like Forbes to tell their readers that investors are “probably overpaying” for a stock, without providing any real research or market analysis to support that opinion.

In the article Bertoni went on to say, “of course trying to value Facebook is as difficult as hiding from your former high school sweetheart online“.  First, I’m not quite sure Bertoni actually tried to value Facebook with any real market research or analysis, other than according to him, extrapolating its value “for fun” with the same multiple that Google had in its 2004 public offering, which was 15.7, to Facebook’s then estimated revenues of $300 to $500 million.  Second, considering Facebook is where your high school sweetheart would likely find you online, shouldn’t that have been one of the indicators to Bertoni that perhaps he’s not qualified to understand the value of Facebook.  ;-)  Okay, he left that one open.

But seriously, Bertoni’s skepticism continued with, “despite the big run-up (in stock price) in six months, little has changed about the business of Facebook“.   Sigh.  He even cited Facebook’s 350 million membership count, as well as their revenues of $300 to $500 million.  Yet, he felt their business had little change?  Really?

Well, its been twelve months since the Forbes article begged the question, “How Much Is Facebook Worth?”, so let’s take at Facebook’s continued trajectory to see if its overpriced today, “for fun”.

Facebook has gone through a 5 to 1 stock split and its stock is currently trading on the secondary market, among sophisticated accredited investors, at an implied valuation of around $50 billion.  They now have over 500 million members, or they’ve gained nearly another 200 million members in the last year.   Their estimated revenue for 2010 is now $1.2 billion, and they are at the earliest stages of deploying their monetization strategies.  In fact, according to VentureBeat, Facebook is about to get very serious about its revenue.  Facebook just leased two floors on Madison Avenue, with the potential to expand up to 150,000 square feet or 600 people, nearly all of which would likely be in sales.

Fifty percent of their 500 million members logon to Facebook every day, and they spend over 700 billion minutes per month on Facebook. The average member has 130 friends, connected to 80 community pages, groups and events and creates 90 pieces of content per month, which in total is more than 30 billion pieces of content (web links, news stories, blog posts, notes, photo albums, etc.) shared every month on Facebook.  Additionally, there are more than one million developers and entrepreneurs running a business on Facebook from over 180 countries, which over 70% of Facebook users interact with every month.  In fact, companies such as Zynga, RockYou, Slide and more have built sustainable businesses that have created billions of dollars in shareholder value on top of Facebook’s platform, just as companies such as Intuit (INTU) and Adobe (ADBE) have created billions of dollars in shareholder value on top of Microsoft’s platform.  Its no wonder Microsoft was the first to fully understand the future value of Facebook when it invested $240 million in Facebook at a $15 billion valuation or 1.6% of the company.

I will slightly agree with Bertoni regarding his supply and demand argument (that Facebook shares are for sale, and everyone wants Facebook bragging rights), but that doesn’t necessarily mean that the investors are overpaying for their Facebook shares in the secondary markets.  Remember, the secondary markets are illiquid, they’re not for traders, they’re for investors, like Microsoft’s investment.  So the question isn’t whether or not your share price is ‘exactly’ where you’d like it to be today, its whether or not you believe it will be worth more in the future, and with Facebook’s growth trajectory, vision and track record, I think we know the answer to that.

The question I’d really like to know is whether Forbes believes Facebook’s stock is overpriced today.

Jay Gould maintains a long position in shares of Facebook (private).

2 Comments

  1. Hello Jay,
    To be fair, if I owned illiquid Facebook stock, I’d continuously hype an inflated valuation too.

    You wanted to know if I think Facebook shares are overvalued? First, what are Facebook shares currently worth? Different exchanges like SecondMarket and Shares Post list different prices. And these kinds of sites, though good for buying and selling restricted shares, are not reliable ways to value Facebook. Just because one rich investor bids for 1,000 Facebook shares at a certain price, that doesn’t accurately set the market value of the company that has more than 400 million shares. It’s not the NYSE, these are very illiquid and opaque markets we’re dealing with. In the past, I have talked with Facebook spokespeople and while they declined to make an official comment on Facebook’s valuation, they said they ignore secondary market prices too. I think private placement deals (more volume, smarter money) are better estimates than random bids on secondary market websites. So I’d value the company near the $35 billion valuation set by Accel Partners sale a few weeks ago.

    Now to your post. You say that my Forbes article, which I wrote 12 months ago, blew it for investors and made them lose money? That’s unfair (how did people lose money?), and a misrepresentation of my article. I was not writing an investment column. My story was about how brokerage firms were collecting stiff fees to buy pools of Facebook. And with its financials kept secret—and no public comps—Facebook shares were impossible for outsiders to value. I was not questioning the growth potential or influence of Facebook. I was suspicious that Facebook shares had shot up 70% in secondary markets without any new material information released to the public.

    You brag that a few months later—not a few days later—your site put a $50 billion value on the company. That value is still irresponsibly high today, even after Facebook has released a few financial figures and a new business plan. You say that revenue for 2010 will likely be $1.2 billion. That means Facebook is worth more than 40 times sales, not earnings–but sales. Today, Google trades at just 7.8 times sales. Does Facebook deserve a nearly 5x premium over Google?

    You also attack my 1-year-old article by listing Facebook developments that have occurred over the last few months—strange logic. Not to mention these new developments fail to support your $50 billion valuation. Email me anytime at sbertoni@forbes.com // Read me at http://tiny.cc/5e1de

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