Facebook’s $50B Valuation Betrays Tech Market Reality

Jan. 4.11 | About: Goldman Sachs (GS)

Not to kick sand in the face of Goldman Sachs' (NYSE:GS) private client group, particularly since I’m a shareholder of the parent company and all, but I think it may have taken a flyer with its internal syndication of the $500 million private placement of Facebook shares. Not that “brand investing” is a bad idea; just ask the shareholders of Berkshire Hathaway (NYSE:BRK.A). And it’s not as though I think its clients will lose money by buying the private round. Under most scenarios, Facebook will eventually go public — or be sold — at a price higher than $50 billion.

It’s just simply a question of the valuation that Goldman landed for what can only be called a “pre-IPO” round.

With a reported $2 billion of revenue, Goldman has tagged Facebook at 25x revenue. For a mature tech story, that’s fabulous -- particularly if you’re the seller. Google’s (NASDAQ:GOOG) currently trading at 5.9x EV/Revenue and 18x forward earnings, with a PEG ratio of 1.15x. Apple’s (NASDAQ:AAPL) EV/Revenue is 4.2x, and its forward EPS is 14.6x, with a PEG ratio of 0.84x. Nothing outrageous about either of those valuations, and each has something like $30 billion of cash on hand to spend on R&D, acquire new technologies or lines of business, or just pummel their competitors with.

The Nasdaq has been flat for a decade, so Facebook won’t be able to ride the tide for its next valuation bump. It’ll have to get there with revenue growth and earnings power; something that both Google and Apple already have in spades, along with the benefit of trade liquidity.