The recent news that Goldman Sachs (NYSE:GS) has valued Facebook at $50 billion has been plastered everywhere, and rightly so. Giving Facebook that valuation puts it amongst the likes of American Express (NYSE:AXP), Kraft (KFT), and Boeing (NYSE:BA).
That's a big deal for any company, let alone one that's just over six years old and was started by a few college kids. And because it's such a big deal and the price of Facebook's shares have more than doubled in the past year, investors are salivating at the thought of owning a piece of this newly-minted tech titan and striking metaphorical tech gold.
From a few perspectives, that makes a lot of sense:
- Facebook has changed the way we communicate and as a result, will probably be woven into the fabric of society for years to come. Hence, why many have called it the "Second Internet".
- Facebook has over 500 million users and it's growing at an enormous rate. That's a huge audience if you can properly monetize it.
- In 2010, Facebook had $1.2 billion in revenue for the first nine months of 2010, resulting in $355 million net income (source).
There's just one small hitch. And, by small, I mean big:
Facebook is absurdly overvalued.
One analyst, Ryan Jacob of the Jacob Internet Fund, estimates that in 2010, Facebook achieved $500 million in Net Income.
At Facebook's current $50 billion valuation, that puts its Price to Earnings Ratio at ~100. That is insanely high.
That same ratio applied to Apple's (NASDAQ:AAPL) $14 billion in Net Income for 2010, makes Apple worth $1.4 trillion; American Express (AXP) would be worth $213 billion and it pegs Kraft (KFT) at $302 billion.
Heck, most of the stock market is probably on sale at this point, if we're to follow Goldman's lead on this one.
Even though Facebook's valuation makes no sense, the hype around the constant price increases of its stock will probably ensure that its stock price will continue to have no relation to its actual worth any time in the near future.