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According to the BBC, last year Facebook generated $1bn in profits. It’s stock market valuation is looking like it’ll value the company at $100bn. Surely, that is the dictionary definition of over-confidence. Facebook would have to increase profits ten-fold to even start to justify the $100bn price tag.
Facebook already has a staggering 900 million users: any jump in profits will have to come from a new business strategy (as opposed to increasing market share). Facebook’s strategy so far seems to be built on the assumption that profitability is purely a function of market share. In fairness, this has been hugely successful (I wouldn’t say no to a $1bn annual profit). But I fear that the traditional toxic mix of herd behaviour and short memory is at play once again.
People follow the herd. If the herd starts investing in Facebook in big numbers it encourages others to do the same. Surely all those people can’t be wrong??
People have short memories. Remember the last technology bubble? The dotcom boom? If you’re anything like me that seems centuries ago (when people were stupid, unlike now).
If I was a betting man (and had any money) I would be betting against Facebook BIG time. I cannot see how their shares can do anything but fall in price. It may take a while for reality to hit home, but reality never stays away forever.
Recommended listening:
I’m Forever Blowing Bubbles by West Ham United
