How Much is Facebook Really Worth?

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, 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

The Daily Reckoning