Goldman got a steal of a deal on Facebook

May 4, 2011

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs got its Facebook stake for a steal. That’s if Renren is anything to go by. Shares in China’s answer to the social networking giant priced at the top of their indicated range and then surged on their first day of trading. That left Renren valued at about 100 times last year’s revenue. On that basis, Facebook is worth $200 billion. Goldman bought in at just a quarter of that. With some bubbly assumptions, the higher figure can almost be supported.

The conventional wisdom says otherwise, of course. Many technology watchers see excess already in Facebook’s value, which has surpassed $70 billion based on private share dealing. There was added concern last week when Reuters reported that a group of shareholders was trying to offload $1 billion worth of stock in one of the largest sales to date. The Renren-implied valuation would also make Facebook worth more than search behemoth Google — and not many investors can see their way to that conclusion.

Still, it’s possible to make a case of sorts. Global advertising spending across all major media, including TV, magazines and Internet, should tot up to about $470 billion this year, according to ZenithOptimedia. Apply an estimated profit margin of 30 percent and a multiple of 15, and the present value of all those ads would be $2.1 trillion. If the world’s consumers were, on average, to spend a tenth of their media time on Facebook, that could make its slice of the pool worth $210 billion.

Perhaps that sounds too generous given that Web advertising dollars aren’t yet anywhere near commensurate, relative to usage, with TV or newspapers. But recent research from Nielsen found that Americans spend a quarter of their surfing time on social networking. That suggests plenty of pressure to close the gap — and grow the whole advertising pot.

Admittedly it takes some suspension of disbelief to arrive at such an eye-watering valuation for Facebook. But Goldman and other investors must be using similar sleight of hand, at least to some degree, to rationalize their own investments in the company. At this point, it may make sense just to play along.

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