In its initial public offering (IPO), which is happening today, the firm is expected to be valued at $104 billion. One Hundred And Four Billion Dollars.
That's nuts, but let's just explain why. Ordinarily, an investor would hope to earn at least 5 per cent on an investment – ideally more, since historically, you can earn that just buying Government bonds. So for a company to be worth $104 billion, you would hope for at least $5 billion a year of profit. Really, to justify the risk of owning shares, you'd want more – $10 billion perhaps. Every year. Forever.
But Facebook's revenue is currently just $3.7 billion, and its profit is around $500 million. So the website is making less than one tenth of the profit you would hope it to earn in the long run. By contrast, Google earns 10 times as much revenue – $37 billion – and 20 times as much profit, and yet is only valued at around $200 billion.
All those Wall Street banks that bought huge blocks of Facebook stock to prop up the price on Friday, including Morgan Stanley, JPMorgan Chase and Goldman Sachs, are going to have a really bad Monday! This will be strike two for JPMorgan Chase!