Facebook's True Valuation, Stock Price and Capitalization

In yesterday's blog entry, I outlined why Facebook will never overtake Google. Most of the valuation of the company at $38 per share is based on unrealized, unmonetized potential. I argued yesterday, that the user base is near its limit of monetization, and gave reasons why.

So lets assume that one of the biggest fans of Facebook, Arvind Bhatia is right about Facebook's search capability. (I don't buy it, but let's go with it for the sake of argument). Bhatia says that Facebook's search capability is better than Google's and Facebook will monetize it. Nobody is better at monetizing searches than Google. They are the gold standard. They do it with less data on the searcher than Facebook, and they outperform Facebook by orders of magnitude in the revenue department.

Google currently trades at 19 times revenues. Facebook at $38 is 100 times revenues. If we say that Facebook is at least as good as Google, then it would be fair to assume that they also would trade at 19 times their revenue. That would make a fair share value of Facebook at $7.22 at share. That would make a market capitalization of $3.04 billion dollars instead of $16 billion.

Just for fun, let us double the fair market valuation to $14 per share because they have close to a billion in followers (although even Facebook admits that a fair percentage are fake accounts). That still is a long way off from $38 and $16 billion.

Facebook has a lot of potential to realize. I suspect that the Morgan Stanley and the hedge funds that bought Facebook did a lot yesterday to support the price at $38 a share in the last hour of trading. And the hedge funds are not going to permit the borrowing of shares to short the Facebook stock, so it may be kept up artificially for a while.

My own risk radar says that this valuation is way too high, and that Facebook will not fulfill its potential. There has to be a correction, like there was for Zynga that lost 13 per cent of its value on the same day that Facebook had its IPO. Ten percent of Facebook's revenue comes from Zynga and its Facebook games, so another red flag goes up.

The thing that really gets me, is that if a geek like me can see the obvious, why can't Wall Street and the pundits see the obvious? Are the financial markets so out of tune with reality, that players like Morgan Stanley and Goldman Sachs can tell us to believe what they say and not believe what our eyes and rational senses tell us?