Facebook is Hemoraging Cash

The scatological vertigo shown here represents facebook's current business plan according to this piece from PE Week Wire.

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That $15 billion valuation implied by Microsoft's purchase of a 1% stake in Facebook--at a time (2007) when revenues were ~$150 million--looks a little frothy today.

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Never mind that it looked a little frothy back then, as--even if you assumed 100% profit margins , a perfect and instant cash conversion cycle, and a 25% VC/PE-type cost of capital--then you're basically also assuming a 24% compound annual growth rate forever. Look, I'll show you, using the perpetuity equation:

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if 'terminal' value at (t=0) = CF0 / (r-g)

and D/E = 0

then, $15 MMMM = 150 MM / (.25 - .24).

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Point is, that's nearly impossible or at least highly improbable. That implies you double in size every 3 years--and I want to emphasize this again--pretty much forever.

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Let's say you buy a dog (let's call her "Izzy") and invested the 10,000 dollars grandma gave you under the Federal tax exempt gift allowance under these circumstances. Well, by the time Izzy's dead of whatever killed Marley, you're a millionaire. You get a second dog (a puggle named "Deuce"), and by the time it get's hit by a bus in year 13, you're worth 8 figures.

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Pretty good deal, eh? Too good? Yip. Well, that's facebook at $15 B.

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And you know what? All this analysis is crap, because tomorrow I'm going to argue to you how this valuation is justified despite all fallacious evidence to the contrary.

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OK-I'll spoil it here: Facebook is going to start charging subscription fees.