4 Jan 2011

The Facebook bubble is down to QE2. Where will it end?

Ben Bernanke is not on Facebook. Today his status update would read: “Look! QE2 is working.”

It is certainly worth the US Federal Reserve boss giving Mark Zuckerberg a poke.

For me this is the only way to explain a truly extraordinary deal that values a company with an unproven business model at $50bn.

That was the remarkable news emerging from New York overnight, as investment banking titans Goldman Sachs, with help from a Russian invesment fund, injected half a billion dollars into the world’s largest social media website.

I was taken back to 1999, when as a cub internet reporter, I was invited to the Barcelona conference of the legendary CSFB technology team. There I was patiently informed that a company’s valuation did not depend on or even require profits or even revenues.

“This is a landgrab”, I was told, and companies could be valued on a per-click basis, or even projected per-click basis. Now clearly this was bubble time nonsense, though the essence of some of what was said in the lead-up to the dotcom bubble was true. There was a land grab on. Some of those companies were to change the world and make an awful lot of money. But most did not. And the valuation metrics were absurd.

And so what about $50bn Facebook? Is each of the 500 million active users really worth $100 for the invaluable information contained within inane warblings and pointless status updates? If that is the case than I would guess that each of the Tesco Clubcard members or Amazon customers are worth much much more, and guess what, they actually are all paying customers.

Facebook is being valued at 30 per more than the whole of eBay. For an unproven business model. Remember that MySpace has sunk almost without trace since being the unmonetised web presence of choice in 2007. So how is Facebook worth $50bn?

Well, the explanation lies in high economics rather than clicks, or friend stats or anything like that. The clue is the investor: Goldman Sachs.

Goldman’s is one of many investors in the world’s banks, currently jolted by the $600bn monetary experiment of the US Federal Reserve. Since the Autumn, the Fed has been directly mimicking UK-style quantitative easing, whereby the central bank hoovers up $600bn US government debt from the likes of Goldman for the Fed’s magic invented cash. This has helped squeeze the return on US Treasuries – the yield – to the smallest amount since 1956 and Eisenhower.

This in turn has meant that Wall Street is looking elsewhere for yield, and so you get investments of the sort we heard about yesterday. QE2 helping to increase the appetite for risk, and eventually asset prices (the value of Facebook, and of Mark Zuckerberg’s now $14bn stake) and that in turn starts a virtuous circle of other companies able to raise equity finance where once there was a despondent triangle of death.

This is as vivid example of QE inflating asset prices as is possible, short of Ben Bernanke, and Mervyn King setting up a joint mortgage company. As I explained in a recent Prospect essay on QE, the US authorities might be encouraged by the experience in the UK.

Yet it is also surely the inflation of a bubble. And QE is not without its costs and its losers.

Quite some start to 2011. Especially for the likes of Mr Zuckerberg. He probably should accept that friend request from Ben Bernanke.

Facebook: What’s it REALLY worth? asks Jon Snow

Facebook isn’t worth $50bn: it’s really worth a lot more, writes Benjamin Cohen