Facebooks Overvaluation (Essay Sample)

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Examining Facebook's Stock Valuation




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Examining Facebook's Valuation
Introduction
Facebook is a social networking incorporation that started back in 2004 thanks to Mark Zuckerberg, the co-founder. The social network grew from a small point and gradually rose to being the second ranked after Google. In May 2012 it held its initial public offering (IPO) with the offering seen as the biggest ever in the internet portfolio. The market capitalisation was around $90Bn USD during the IPO period. After this offering, it rose tremendously to around $140Bn and a share price of $55USD which was initially at $35. Although Facebook's profits lowered after the IPO, it still had grounds to play safe that is it still remained of great value. How then did it ensure its high valuation on the stock market despite low profits? This essay examines this scenario.
Body
Let's start by looking at its market transaction. Market transaction method (MTM) is a business stock method that bases on the recent private stock sale transactions. Facebook relied on this method between its first quarter of 2011 and first quarter of 2012. During this period, there was a high increase in sales of third party private shares on Facebook. This made Facebook to assign a 50% weighting in its fair-market indexing. The question here is, how did these private transactions carried out and how were their prices ascertained?
Most of the private transactions of Facebook shares were done without any warning and announcement. Big shareholders and organisations negotiated and agreed on terms secretly without the knowhow of the public. Other private transactions were done via the internet that is online through second market and sharepost. It is only the media that came in and started reporting about the secondary market transactions. Now, assuming Facebook trades at US$44 a share on Secondmarket and US$38 on larger blocks of shares, there's great profit!!
Another factor highly regarded when it comes to Facebook's overvaluation at the stock exchange market is the intangible assets. Intangible assets are the identifiable non-monetary assets that cannot be seen, touched or physically measured. They include assets like cash, working capital and property. Total liabilities are then lessened from the sum total of these assets giving the total stockholder equity. Today, Facebook has a stockholder equity that amounts over USD5 billion and at least USD8 billion of available credit. To add on this, the company bought more than 1,300 patents from Microsoft and IBM. However, there was no exact amount of money transacted. To better itself, Facebook also acquired small firms and companies who were in need of advertising on their site.
Illiquidity also leads to great achievement in the business. If we look at Facebook's profile on the SecondMarket, we note that its market capitalization rose drastically from USD5 billion to USD12 billion during the last Q4-2009. Well, this proves to be right, Facebook's value had risen by a value of USD8 billion when a single person or firm paid USD4 million for 100,000 shares.
The future of Facebook is seen to be targeting even a larger audience by several advancements. Several developments have been made by Facebook starting from the mobile app install Ad was launched letting developers promote their apps in the Facebook news feed Ad-links connecting direct to download pages in the Apple App Store and Google-Play. Periodically, it's updating its mobile SDKs for iOS and Android to make it easier for apps to share content to Facebook hence enabling developers grow. Presently, Facebook continues to sign people quickly all over the world. Emerging markets of developing and third world countries for instance China, Brazil, India are where Facebook is reaping most of its growth because of high population growth.
Conclusion
It can be seen that Facebook had made several advances to its valuations prior to its IPO. Facebook raised its IPO price again on the assumption that their limited public offering had happened and that a public market for their first class common stock had been created and therefore exempted any marketability or liquidity discount. Intangible assets acquired by Facebook also contributed much to its worthiness. From its IPO in 2012, it has seen an inevitable increase in its shares as more people and institutions are turning to using it. Big firms are paying for their Ads and hence profitability to Facebook. Today, Facebook is ranked the second in the world before Google; the largest and richest of all.