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Facebook IPO

|Includes: GOOG, The Coca-Cola Company (KO), MSFT

I've been given estimates anywhere from $6.5-$10 billion.

Before I give my opinion lets go over some numbers.  As I understand it, Facebook generates Sales in the $200-250 million Range. To provide a very simple illustration lets consider such a price with respect to the liberal assumption that sales become earnings.  At $6.5 biilion you'd be paying 32x earnings if they earned $200 million.  Google (NASDAQ:GOOG) sells for 31x earnings, which is probably too high.  Don't get me wrong Google is a very nice business-for now.  But if you are like me, you have a hard
time paying a premium for lots of certainty and an even harder time paying a very large premium for lots of uncertainty.  I recall Bill Gates saying back in the late 90's that he didn't understand how Microsoft could justify the same multiple as, say, Coca Cola (NYSE:KO).

In 10 years, the probability of Microsoft (NASDAQ:MSFT) NOT being number 1 or 2 in operating software is small, but it's not nearly as small as the probability of Coca Cola NOT being number 1 or 2 in the soft-drink business.

What would have to happen for Coca Cola to lose its dominant position? Microsoft? 

I think it's clear why Mr. Gates would offer such a suggestion-that there are only a few things that could destroy Coca-Cola and way more things that could destroy Microsoft.  Is it not more sensible to pay LESS not MORE for uncertainty?

Moreover, software is only as good as the people developing it.  If you get rid of the 10 most valuable guys at coca cola, give them $1 Billion and say now go compete with Coca Cola, they couldn't do it.  They wouldn't come even close.  The same reality does not exist in the software business.  If the talent goes, the business goes.

From a slightly different angle, Facebook is apparently losing money, so
you're not buying earning power.  If you are not buying earning power, then
you are buying assets.  Software companies, especially Facebook, have few, if any tangible assets-meaning investors are buying intangible assets (Goodwill). But
Goodwill without significant earning power is worthless.

It may be wise to leave this one for the venture capitalists and unintelligent speculators.  My preferred method is to identify businesses that are very likely to compound at very attractive rates of return even if a whole lot of things go wrong.  A whole lot of things will have to go perfectly for Facebook to get Earnings to the 300 million dollar level and I'd consider that still too expensive.

Disclosure: Long Coca Cola (KO)