Well, at least you’ve still got your friends – your Facebook friends.
That well may be investors in the upcoming Facebook IPO’s only consolation, say two “econophysicists” whose analysis indicates the social-networking giant’s proposed share price of between $77 billion and $96 billion is vastly overvalued, reports New Scientist.
Given that financial institutions do not publish the methodology they use when announcing these valuations, Peter Cauwels and Didier Sornette, entrepreneurial risk analysts at the Swiss Federal Institute of Technology Zurich, developed a methodology of their own based on the historical evolution of the number of the site’s users, which is periodically published on the Facebook press website.
“Economic theory dictates that the value of a company is basically the present value of its future profits. To estimate Facebook’s value through its future profits, we need to have a view on its user growth and how this will evolve in the next 10 to 50 years,” Sornette wrote last year.
While much of the excitement around the pending May 18 IPO is fueled by what has been an exponential growth in the number of users – currently at over 850 million and rising – Sornette and Cauwels caution that the company’s growth charts already show signs of evolving from an exponential curve to an S-curve.
Applying the constraints of competition, the limited number of user devices – such as smart phones and PCs – impenetrable markets and a limited world population, the growth rate in new users will stabilize, the exponential rise will decay and eventually reach a ceiling. Growth then follows an S-curve and is limited by factors such as the rise in global population or GDP.
Already, Facebook founder Mark Zuckerberg has begun referring to the volume of sharing as a better measure of site traffic than the number of unique users, indicating the company is adapting to the reality of coming market saturation.
The researchers’ model puts Facebook’s fundamental value – even with the most optimistic, but realistic, growth forecasts – at no more than $30 billion. Cauwels credits the company’s unique position as the biggest social-networking start-up as worth another $30 billion.
“Investors should be aware that everything they pay above $30 billion is just an option on future potential, and everything above $60 billion is bubble money,” he said.
If their statistical and numerical analysis is not sufficient to convince those hoping to make a killing on May 18, Cauwels offers the warning that the next generation is already starting to think Facebook is boring “It’s something their parents are using,” he said.