Merryn's Blog

Can Facebook really be worth $25bn?

Facebook is currently valued at $25bn. It may be an enormously popular website, but it will have to start making an awful lot more money to justify that sort of valuation.

A friend just back from seeing The Social Network, the newish film about the creation and development of Facebook, tells me it gave him a "bit of an Ocado feeling". By which he means that it looks like a company set up by a few privileged young men that appears to make no long-term financial sense. We've looked at Ocado a few times before so we will just note that it hits regular new lows and move on.

The film claims that Facebook is now worth $25bn, up $10bn from its implied value in 2007 when Microsoft took a small stake. But the more you think about it the more you might find yourself at something of a loss as to why. At the moment the firm is expecting to generate around $1bn this year, most of that from advertising. It needs to up that by about $24bn to be worth $25bn, one times sales being a reasonable valuation for most companies.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But how can it do that? Sure, one in 14 people in the world has an account. And sure, with that many names on a list you'd think a firm could find something to sell for a profit. But what? More advertising? Not as easy as it looks. Go on to your Facebook account. How many ads can you see? There is one on my page for Specsavers. Not much good to me as I don't wear glasses. I won't be clicking.

And I'm not alone. Facebook has a much lower click-through ratio than most major websites (the likes of Google for example). That's because its users are relatively tech savvy they can block ads and are also well programmed to ignore them. They also use the site to communicate, not to shop. So all inallputting on 24 times more ad revenue looks like a tough call.

Advertisement - Article continues below

More customers? Maybe. But one in 14 people in the world seems like a good client base already, and monthly growth of new subscribers is down from 170% back in 2008 to 4.5% now. New services? Maybe, but Facebook users are a savvy lot used to getting their current services for free. And, as I have said already, they aren't there to buy stuff. They are there to hang around with their mates. What might they pay for? Even if Facebook thinks of something there is every chance its users will buy it from someone else just like users of MySpace did when Facebook arrived on the scene in the first place. The public can be horribly fickle.

Finally, I'd worry about privacy. Facebook has been caught out on this one several times already, not least yesterday. Might there come a day, particularly as Facebook users grow older and have more worth stealing, when they won't want to use a service they can't be absolutely certain won't pass their mother's maiden name on to cyber criminals?

Facebook is a great and much loved site. It may overcome all these things. It may even one day be worth $25bn. But it certainly isn't a given.

Still, the movie seems to be doing pretty well: it has already taken over $80m at the box office.



Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020