Facebook Doesn't Need To Fail for Its IPO To Be a Bad Deal

A blog about business and economics.
May 16 2012 2:56 PM

Facebook Doesn't Need To Fail for Its IPO To Be a Bad Deal

Steven Johnson waxes bullish about Facebook on the occasion of its looming Initial Public Offering.

It's a good piece, but I don't think it adequately distinguished between the idea that Facebook is likely to be a successful company and the idea that a $100 billion valuation is reasonable. McDonald's, for example, is a very successful company with a $93 billion market capitalization. Surging Wendy's is at a mere $1.75 billion or so*. The premise of Facebook having such a large valuation isn't just that the company will be successful, but that it will become much more successful than it already is. Merely getting every single human being on the planet earth to become a Facebook user wouldn't be enough for a $100 billion valuation to be in line with a standard price/earnings ratio of 15. Facebook would have to turn every single person into a customer and increase its per customer profits. Is that possible?

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I have my doubts, personally, but the point is that Facebook could easily miss this target and still be a wildly successful company. If it ends up flattening out at 4 billion users and $5 billion in annual earnings, that'd hardly be the second coming of Pets.com—it just wouldn't justify a $100 billion market capitalization.

* CORRECTION: I initially wrote that Wendy's had a market cap of $60 billion.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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