Is Facebook worth the price?
ON MONDAY, news surfaced that a small investment fund, GSV Capital, had purchased $6.6m worth of private shares of Facebook, valuing the popular social network at $70 billion. The shares of GSV Capital, which are publicly traded, shot up 42% on the news, adding $14m to the fund’s market value. That suggests the stock market believes Facebook is worth roughly twice its current private market valuation.The case of GSV Capital is just one illustration of the enormous pent-up demand in the stock market for social networking issues, and Facebook is at the top of investors’ wish list. No wonder these companies are beginning to flock to the public markets. The latest in line is online game maker Zynga, which is reportedly ready to file for an initial public offering (IPO) as early as this week. Facebook is expected to go public next year.Will investors’ appetite steer them towards profitable investments? Count Berkshire Hathaway CEO Warren Buffett among the sceptics; in March, he told reporters that “most [social networking companies] will be overpriced. It’s extremely difficult to value social- networking-site companies. Some will be huge winners, which will make up for the rest.”One could argue that the last sentence sums up the technology venture capitalism model. However, stock market investors are at a large disadvantage relative to venture capitalists. To begin with, venture capitalists put together a portfolio of investments in growth companies to raise their odds of hitting on those “huge winners which will make up for the rest”. Investors who don’t follow the same approach are betting that they can identify the rare winners at the outset, a very tall order.read more