Don't fall for this scam!

I recently posted a link on Facebook to an article on Fox Business reporting that Goldman Sachs has invested $50 million and a Russian investor (Digital Sky Technologies) has invested an additional $450 million in Facebook based on a prediction that the company's valuation is at $50 billion.  To me, this is the most blasphemous financial speculation I have come across in some time.  There is simply no way that the intellectual property and hard assets of Facebook could have valuation at anything near that exorbitant amount.  For comparisons sake, let's look at some other tech companies that are already publicly traded.  Yahoo is valued at roughly $20 billion.  Their fiscal 2010 revenue hovered between $4 and $5 billion.  Facebook's revenue was down around $2.5 billion.  Yahoo also leads Facebook in total percentage of internet users by roughly 8% though Facebook users spend more in total amount of time on that site.  Yahoo's revenue per user runs at about $8 while Facebook's revenue per user runs at about $4.  Let's also look at Google's valuation.  That company is worth about $180 billion with total 2010 revenue just over $20 billion.  Google also leads Facebook in total internet users but by only about 6%.  However, Google's revenue per user is about $24.  These are the most comparable companies to Facebook in that they provide only digital or cloud service and not hard goods like eBay or Amazon does.  However, if you look at eBay and Amazon you will find that they have valuations closer to Facebook (about $40 billion and $80 billion respectively) but they annihilate Facebook in terms of revenue at $9 billion and $30 billion respectively in 2010.  So it would appear that this newly reported valuation of Facebook is inflated to a large degree.  As everyone knows Facebook is free though.  Right?  So how do they make money now and what are their long term plans for revenue generation?  They get the majority of their revenue currently from advertisements (those things on the right side of your Facebook page that apparently at least some of you actually click).  The rest of their revenue comes from the online games that are embedded into the Facebook experience wherein they get a share of revenue from sales generated in those games (like when you buy those crazy Farmville gifts).  However, it doesn't appear that their long term plan is to remain with those two income streams as their primary revenue sources.  Facebook has already positioned itself as a cross platform marketing tool.  This is evidenced by the ever increasing number of pages on Facebook from other companies such as Lowe's, Home Depot, Budweiser, Miller Lite and what seems to be a never ending list of companies.  It turns out that their long term goals are to bring in corporate electronic storefronts and make purchasing things from those electronic storefronts straight from your Facebook page possible.  An example of how this would work:  Best Buy obtains a Facebook marketing page.  They advertise certain products on that page.  Facebook functions almost as a credit card (or as PayPal currently does for eBay and other online stores) by facilitating the financial aspect of the transaction then receiving a small percentage of that transaction for their trouble.  That sounds like a sound business plan, right?  But how many people are going to be willing to use Facebook for financial transactions given their long and troubled history with regards to protecting user's privacy?  I know I wouldn't be interested in that.  Another thing that I have trouble with is Facebook's questionable business practices and evasiveness with how they operate their business.  How is that going to look when the SEC examines the company prior to their IPO?  Sounds like there could be some flaws in their business plan, right?  At best, Facebook's future financial plans are fraught with risk.  So, why then would Goldman invest in Facebook at this point?  Put another way this question would be "what do they stand to gain?"  The answer is that they stand to gain a lot financially.  I believe that they could potentially benefit from their investment when Facebook finally decides to make its IPO which most believe will end up being somewhere in 2012.  How would they benefit you may ask?  Easy.  They want to position themselves so that they are the underwriter of the IPO.  They would stand to make oodles of money initially from such an IPO as it would be very likely that there would be a huge media frenzy surrounding this event and that would drive up prices artificially.  So, I'm not that surprised that Goldman would want to invest a token sum in Facebook at this time in order to leverage themselves into the frontrunner position when Facebook needs an investment banker to underwrite the IPO.  That's sound business on the part of Goldman.  But the real losers in this deal are likely to be the unsuspecting public who succumb to the media frenzy that will no doubt surround the Facebook IPO.  They are very likely to buy their shares at artifically elevated values due to transient increased demand in the initial run in phase of selling.  Then when the world figures out that it was all just hype and that there is actually very little substance to this as an investment the bottom will fall out of the stocks value and those investors will be left holding the bag so to speak.  Goldman doesn't have to worry about the $50 billion invested now as they will make much more than that by managing the IPO.  So for them this is a sound investment.  However, for all those folks who will no doubt buy into the Facebook hype during the IPO they will lose large amounts of money.  That's my prediction anyway.  I just don't believe the hype.