Facebook fails the disappearance test

By DAVID MOON, Moon Capital Management, LLC
July 24, 2011

The Wall Street Journal recently interviewed varied business professionals who opined that Facebook is worth somewhere between $100 billion and $234 billion.


Rupert Murdoch’s News Corporation bought MySpace in 2005 for $280 million and then invested another $2 billion in the business. The company had 20 million users at the time of his purchase. When he sold MySpace earlier this year for a mere $35 million, the number of users had grown to 63 million.

Murdoch’s net investment was an average of $125 per MySpace user. His sales price was a whopping 55 cents per user.

When Facebook eventually has its initial public offering it will rival a royal wedding in terms of excitement and media coverage. If you are tempted to beg your broker for shares or buy them in the secondary market, remember this: the people who currently own Facebook don’t need any additional capital. They won’t be selling stock in order to make friend requests or develop new ways to poke people.

They will be selling stock because they would rather have cash than Facebook stock.

Unlike the geniuses in the Wall Street Journal article, I can make just as compelling an argument - and maybe more so - that Facebook is worth zero.

Facebook fails the Disappearance Test.

The Disappearance Test isn’t foolproof, but companies that pass the test are usually around long after most startups are forgotten. It’s pretty simple.

What would happen if a business disappeared tomorrow?

What about Walmart? Some people might consider its immediate demise a godsend, but if Walmart disappeared it would be a pretty big deal. Ten percent of every retail dollar spent in the US is spent at a Walmart. The company employs 1.4 million people in the US and 2.1 million total. It generates a billion dollars a day in sales.

That’s a huge deal.

What if the world’s largest shipping company, Maersk, disappeared, along with all of its cargo ships? Or Norfolk Southern?

Pretty big.

If Facebook disappeared it wouldn’t matter to anyone except the folks who play the stupid Farmville thing. And those Farmville people would just start playing angry birds or solitaire. I’m pretty sure they wouldn’t start reading the Journal of Fluid Mechanics or playing three dimensional chess. Everyone else would just go back to sending emails or start using Google + or something that will be invented next week.

So what is Facebook worth?

The market capitalization of Google is currently $151 billion, or $1.51 per user based on the company’s claim of one billion unique visitors to its various sites each day. That’s about three times the 55 cents per user MySpace just fetched in a fire sale.

At a $100 billion valuation, Facebook is theoretically valued at $133 per each of its 750 million claimed users. That’s about equal to the silly price Murdoch paid for MySpace. It’s also almost 90 times the per user value of Google.

I don’t know what Facebook is worth, but it’s not worth 90 times the relative value of Google.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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