'If Facebook's Profit Model Stays the Same, This Valuation Doesn't Make Any Sense'

The most highly anticipated IPO in history didn't put on much of a show. As I type these words, Facebook is currently trading within decimal points of its initial price of $38. Even so, the company's market cap is higher than McDonald's or Pepsico.

Espen Robak is the president of Pluris Valuation Advisors, where he studies and values private companies trading on the secondary market. I talked to him this morning just as Facebook trading began. This conversation has been edited.

THOMPSON: Let's cut to the chase. Are the people buying Facebook today idiots?

ROBAK: It's funny, Henry Blodget made the point earlier today that companies aren't going to go public anymore until they're ready to trade sideways. We shouldn't expect to see a huge pop. But Facebook is a really rare investment. Is it perhaps the biggest internet property in the world? Yes. Is it a big risk? Yes.

If you want a stable mature tech company at a reasonable valuation, you should buy Apple or Google. If you want a brand new start up, you should chase some flavor of the month, a lot of which are on the secondary market. If want something that's going to have explosive growth, you should have invested in Facebook a long time ago. [Note: For the moment, Robak is prescient. He made this comment before Facebook's IPO was flat.]

THOMPSON: A day is just a day. How high will Facebook go in the next few months?

ROBAK: The people who bought in the secondary market came in right around $44. Those shares are locked for 180 days. So you've got to think those people thought the shares were worth in the $50s and $60s at least.

THOMPSON: So why was the IPO priced at $38?

ROBAK: The $38 figure is made up. It represents a managed number designed to pop a little, but not too much. But you saw LinkedIn. They priced at $45. Their last trades on the secondary market were around $35. They popped to $100, and they're still trading around there.

THOMPSON: To be priced in the $50s or $60s would mean Facebook is worth nearly $200 billion. That's not just McDonald's territory. That's Google territory. How on earth can a company with only $1 billion in annual earnings be worth as much as Google?

ROBAK:It might seem insane. But it's not insane if you think about the reach of the company as a web property. From that standard, it's already bigger than Google. Nobody knows what Facebook's revenue and profit model is going to be. If their revenue and profit model stays the same, this valuation doesn't make any sense. There's no way they can just squeeze enough plain old ad revenue to justify these numbers. They must change. We don't know what this is going to look.

THOMPSON: I find that a remarkable statement: "If their revenue and profit model stays the same, this valuation doesn't make any sense."It means investors are spending millions of dollars in the hope that Zuckerberg will pull a rabbit out of his hat.

ROBAK: Think of it this way.. Google has a pretty standard price-earnings ratio right now -- around 15 to 20. That's where Facebook will ultimately have to get. They need vastly larger profit. How many more ads can they sell? Four times more in the next year? I don't think so. They have to get revenues from somewhere else.

THOMPSON: Where will Facebook get that money?

ROBAK:I think the media has gotten this part right. All the data that Facebook is gathering about us will become valuable at some point. Right now, Google can charge so much more for their advertising because they know what you're searching for, what you want to click. Facebook can take all of this stuff you write about and turn it into metrics about what you want to buy. I can't tell you how, but I think that's the idea.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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