Skeptics believe LinkedIn is grossly overvalued, just as the doubters are harrumphing about Facebook.
Both companies are expensive by traditional benchmarks. LinkedIn has a market value of about 12 times its projected revenue this year, while Facebook went public with a market value of about 20 its projected 2012 revenue. Google, by comparison, has a market value of about six times its projected revenue for this year.
But Facebook hasn't been as aggressive as it could have been about selling ads or finding other ways to make money where its visitors, on average, dwell for an average of 6½ hours per month, according to comScore Inc. Instead of ramping up revenue, Facebook has concentrated on attracting users — an emphasis that is bound to pay off.
One of the main reasons Facebook is likely to figure this all out is that Zuckerberg hired Sheryl Sandberg as the company's chief operating officer in 2008. Sandberg played a key role in expanding Google's advertising system during its first few years as a publicly held company, a period when the company's stock hit its peak so far. Sandberg brought not only her own expertise to Facebook but also hundreds of other former Google employees who defected to the social network in search of the next big thing.
They found it, and it's still not too late to get a piece of the action.
STEER CLEAR OF THE HYPE
By BERNARD CONDON
AP Business Writer
NEW YORK — First, forget the numbers and go with your gut: Given the breathless press coverage, the ubiquity of its product, the Oscar-winning film about its unlikely success and the rock-star status of its 28-year-old founder, do you really believe the smart folks on Wall Street coming up with a stock price for Facebook resisted the temptation to wring every cent out of buyers?
In investing, hype is the enemy. I was skeptical from the start.
The company listed a range of possible prices for its initial public offering of stock, then raised it, then told us that insiders and early investors would be selling even more of their shares in the offering than they had planned. Now I'm convinced: Don't touch this stock.
The banks helping take Facebook public want us to value this 8-year-old upstart at $104 billion, more than Disney or Kraft Foods, though those companies earn three and four times more. That top valuation is also more than 100 times Facebook's earnings last year, versus 13 times for the average company.
At such a high price, it will take years for this so-called earnings multiple to fall to a more reasonable level, and that's assuming the company can maintain its torrid earnings growth.
To make money in Facebook, you're betting that other buyers will be just as willing as you to hold their nose at the valuation, and keep doing so for years.
Facebook grew its earnings 65 percent last year, faster than at most companies, so you should pay more for it than you would the typical company. But how much more? Profits at Apple grew 85 percent last year. Its stock is trading at 13 times earnings per share.
And while the big profit growth for Facebook is impressive, it's slowing, and has been for three years. Last quarter, the growth turned negative, meaning it fell — down 12 percent from the first three months a year earlier.
I think Facebook is one of the best things to happen in America in years. It's an unlikely, brazen success that makes you believe that the nation's best days may still be ahead. A college kid starts an online bulletin board for his classmates in 2004, and now one-seventh of the world's population is using it.
And the company is not just profitable, but incredibly so. Whereas most big, publicly-traded companies have to content themselves with pulling 13 cents of earnings out of every dollar of sales before paying taxes, Facebook gets to keep a seemingly impossible 46 cents.
And therein lies another problem: No company can sustain margins that high for long. If you believe America is a place that gives rise to destructive, capitalistic forces like Mark Zuckerberg, you know those margins are going to collapse, and fast. They are too high not to attract competitors.