Facebook is near saturation in many developed countries and is starting to decline amongst those already using it. This year, it made $2Bn, but in the next year or two, after perhaps a short period of further growth, that is likely to halve and continue to shrink. It is therefore either at or near its peak value now, but sensible valuation for investment purposes must take account of its likely imminent decline, so it is worth rather less than its estimated $100Bn, a figure I personally find astonishingly naive, and seems to assume that investors are still extremely gullible even after the last dotcom crash.
Facebook’s current slow decline will accelerate rapidly as it becomes less cool to be seen using yesterday’s tools. Being cool (or whatever cool is called this week) is very important to people using Facebook.
Its size is still growing because more people are discovering it than are discovering they are bored with it, or frightened by privacy concerns. But worldwide, there aren’t enough people that haven’t used it and are potentially interested to continue to replace those that will, and most of the new members are relatively poor so of less value to advertisers.
It will also remain at severe risk of rapid decline due to new entrants stealing its core members and their loyalties.
If we assume the current $2Bn may grow to a peak of $3Bn before rapid decline sets in, and then it falls to $1Bn before starting to stabilise as a pretty walled garden, but take into account its high potential ongoing volatility, it is hard to argue for more than 8 times current profits for a valuation. Using $1Bn as an estimate of ongoing potential sustainable profit level, that gives a realistic valuation of $8Bn. I wouldn’t pay a penny more, and I’d still consider that a risk that requires a high level of skill to maintain via ongoing reinvention.