Google has a market capitalization of $200 billion, roughly four times Facebook’s implied value, based on recent rounds of investment Facebook has raised.
Yet Facebook’s revenues in 2010 were 16 times lower than Google’s. All things being the same, the only way one can justify the current Facebook valuations is if the market expects higher growth of Facebook’s revenues than from Google, says Dr. Siddharth Shah, Efficient Frontier senior director, business analytics.
If the market expects Google’s revenues to grow at 20 percent a year for the next 10 years, Facebook’s revenues would have to grow at 46 percent a year to justify its valuation, relative to Google. Facebook would have to grow between three and five times faster than Google over 10 years to justify a $50 billion current valuation, for example, says Shah.
The other way of looking at matters is that the market is vastly underpricing Google's growth prospects. That's a harder argument to make as Google is a public company, and there is nothing "implied" or theoretical about its market valuation.
A rational person might argue that Facebook therefore is overvalued.
For many people, the more interesting thing at the moment is a wave of new companies now being founded. Some of us expect to see a couple to several giant new industry leaders formed, to lead the next great wave of Internet innovation after search and social networking. No matter how useful, and how big, any single company is, there is always another wave of innovation, with a new category leader.
Recall that Yahoo was founded in 1994, AOL in 1995, Amazon and eBay in 1996. Google was launched in 1998, Napster and MySpace in 1999.
Wikipedia and Wordpress were founded in 2001, YouTube was launched in 2005, Twitter and Facebook in 2006. Groupon was founded in 2008.
There always is a lag between "founding" and "segment leadership." That emergence could take three years, five years or more. That means firms now are being founded that will emerge as a big deal in three to five years. Facebook will not be the last "big thing" to come out of the Internet.
But in the startup space, one way to look at matters is that one or two firms may deserve a rich valuation because they will be huge, profitable, significant leaders of their industry segments. Some others will deserve significant to moderate valuations on a small revenue base, because they will be bought out before they become "too expensive." Many, if not most other contenders deserve valuations that are small, nil or unjustified, because most firms will not lead, become substantial revenue generators, or even survive.
Nobody can be sure what Facebook is "worth." Some argue it is overvalued. Others might say just about all emerging Internet firms are overvalued, and that a reset is coming. But that's the way markets work. If there is an expectation of huge reward, significant bets will be placed. If the size of the opportunity is big enough, lots of bets will be placed. A third will die, a third will never pan out and a third actually will be profitable, with truly-huge winners being few.
Some might argue the important thing for most people who do not have an actual stake in funding or leading a new company, but operate someplace else in the ecosystem, is to be on the lookout for the next emerging important segment. It surely is coming.
