For sale: social networking site. Asking price: $100 billion. With a valuation of 200x earnings, it's not a question of whether the Facebook bubble will burst, but when. Investing in Facebook stock makes sense as long as you can count on someone else being willing to buy your shares for even more money in due course. It gets annoying for the shareholder when the market shouts that 'the emperor has no clothes'.
Facebook's estimated profitability was nearly $500 million in 2010. At a valuation of $100 billion , Facebook would need to maintain its current level of profitability for 200 years to achieve this amount as cumulative profit. Now, we can be somewhat optimistic and expect Facebook's profits to increase significantly in the coming years, but even then. If profits quadruple to $2 billion per luxembourg phone number list year, the current valuation is a whopping 50x future annual profits. The implicit assumption here is that Facebook will still exist and be very profitable in 50 years. In a very volatile internet world, that's quite a big assumption.
What is striking about the financial valuation is that it hardly takes into account risks that could undermine Facebook's profitability in the long term. Look at what happened to Myspace. It was wiped out by Facebook. What guarantee is there that the same thing won't happen to Facebook thanks to a start-up that is now taking its first steps in a garage somewhere? The threat can come from all sides.