The recent news that Goldman Sachs (NYSE:GS) had invested in Facebook which valued the social networking business at $50 billion. Why and should this matter?
Not really. Being a private company, Facebook doesn't have to reveal its numbers, and we have no way of knowing whether or not the value imputed by the investment of Goldman on them is accurate at this time, or based on future optimism.
That's fairly obvious, but if we think back to Google (Nasdaq:GOOG) at a similar juncture in its history, it's a very similar scenario as Facebook's is now.
The reason I mention whether it matters or not is because whether or not Facebook is worth $50 billion or not isn't relevant, for the same reason it wasn't relevant to Google: they're going to get the valuation either way.
It's similar to a car zooming along the interstate at 100 mph and it suddenly runs out of gas. The powerful momentum it has allows it to continue going on whether it has gas in it or not.
That's the Google, Facebook phenomenon. It's about hype and potential, and that people believe they'll be able to measure up to it whether there's gas in the tank or not at this time.
The valuation of Facebook is meaningless. You can fill in the blank and people would believe it on momentum alone. That's the power Facebook has, and will have if they ever do decide to go public.
Even if they don't they retain that power, the reason they continue to attract investment dollars without the need to go public.
No matter what news emerges about investment in Facebook, they have the momentum to make whatever valuation emerges as a result believable.
What does all of that mean? Other than the ability to continue operating while they build up and out their business model, literally nothing.
For better or for worse, Facebook is considered to be on forward momentum with or without the goods, and have no need to prove one way or the other whether they really are running on gas or not.
Eventually they'll slow down in growth and momentum as far as users goes, and at that time we'll see what's really under the hood of the Facebook car.
Until them, the hype and mania will continue, and exorbitant valuations are sure to be fixed upon Facebook without any way of knowing whether they're based in any way on reality.
That's not important now, but it will be if they ever go public and prices are based on not much more on smoke and mirrors; at least as to how high the company is valued goes.
Everyone knows they're probably starting to make money now, but the current price of the company is obviously based on future outlook, and that's anybody's guess as to how that's being figured out.
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