01/03/11 Baltimore, Maryland – Welcome to 2011… Early this morning, we learned Goldman Sachs and a Russian firm called Digital Sky Technologies have pumped $500 million into Facebook. The deal values the “popular social networking site” at $50 billion… more than eBay, Yahoo! or Time Warner.
Ha. Ha. Ha!
This first nugget of fresh news makes our first official forecast of 2011 a slam-dunk: Facebook and Goldman will fleece millions of Americans of their retirement funds… maybe not this year, maybe not next, but before they are done with the whole charade.
Sure, we know the story. Social media exploded in 2010. Facebook passed Google as the most visited site on the planet, with one out of every four webpages viewed in the U.S. belonging to Facebook. Yeah, yeah, it’s a good story.
But we’ve also seen this movie before.
You have 500 million people playing Farmville and Mafia Wars and telling the world how wasted they got last night… but what makes them worth an average $100 in market value?
Our own social media maven suggests “the real value” of the company is in “leveraging all the user data they’ve collected on their members. The ability to develop tools, apps and targeted advertising will allow you to monetize. As they open up their API, it will allow developers to access this info and use this community to create more and more interaction.”
That’s possible.
But we think the real value is in the story itself, reflected in the company’s shares… which you can’t buy right now.
Barely a month ago, TechCrunch.com reported Accel Partners, an early-round investor in Facebook, sold off a big portion of their stock in the company at a $35 billion valuation — a return of “something like 247 times” on that sale.
Now Goldman intends to set up a special purpose vehicle (SPV) so its high-net-worth clients can skirt IPO laws and get their money in before Facebook goes public.
“While the SEC requires companies with more than 499 investors to disclose their financial results to the public,” says Andrew Ross Sorkin on his site DealB%k, “Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.”
Whether Facebook is profitable now – we don’t know because the books are still private – or whether they can figure out how to be profitable in the future is largely irrelevant. The big money is going to be made early in the “secondary market” for private shares.
If and when the IPO happens – like any good Ponzi scheme – retail investors, those last in the door, will get stuck holding very expensive paper.
Our advice: Steer clear.
Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
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Steer clear and then close your FB account!! That’ll learn ‘em!!
The one thing that I’d add is that with a private company with little float and a high perceived demand for shares there can be a scarcity premium.
Is Google worth $165B? Yes, IMO, because there are an abundance of investors in the open market who have invested at that value.
Is 1% of Facebook worth $330M? Apparently yes, because there have been enough private investors who have bought shares on the secondary market at that price. But, there’s no evidence that they would be able to sell 25% or 50% of the company at that valuation.