Goldman Sachs Group Inc. has bought a stake in Facebook Inc. that values the website at roughly $50-billion (U.S.) - a move that will likely put more pressure on the Web's most popular social network to go public, and raises the spectre of a new bubble in the technology sector.
The investment bank and a Russian investor have reportedly invested about $500-million in Facebook, which still remains a private company. According to The New York Times, Goldman is expected to raise as much as $1.5-billion from clients willing to invest a minimum of $2-million for a piece of the social networking platform.
The deal gives Facebook a higher market value than long-established Web giants such as eBay Inc. and Yahoo Inc., which have significantly higher revenue numbers. Based on a reported $2-billion in annual revenue, Goldman's Facebook valuation would give it a price-to-sales ratio in the range of 25 - roughly four to five times higher than companies such as Google Inc. and Apple Inc.
The Goldman investment is also the latest in a string of high valuations in the tech sector. Late last year, Google made an unsuccessful $6-billion bid for group-discounts site Groupon - a company that just recently celebrated its second birthday. Investors have also assigned multibillion-dollar valuations to sites such as Twitter, which still struggles to make money off its quickly growing user base.
In an industry that saw massive destruction of wealth after the tech bubble burst a decade ago, observers are quick to point out that Facebook has achieved a level of integration with the Web that few other startups did, potentially justifying the $50-billion valuation. While the site lags behind many of its competitors in revenue, it leads the way in terms of how much time its users spend on its website - something advertisers are particularly interested in.
"For someone to come and do what Facebook has done, that would be a multi-year exercise," says Michael Scissons, president and CEO of Toronto-based social media marketing firm Syncapse and previously a director of Facebook media sales in Canada.
"We're seeing a changing of the guard. They're going to have a run of some magnitude."
For advertisers, Facebook has become a nearly indispensable tool. "I don't think you can have a conversation about social (media) without also talking about Facebook," said Barry Lowenthal, president of The Media Kitchen, a media buying firm in New York whose clients include Armani Exchange, Victoria's Secret, and Vanguard Investments.
The site is both inexpensive and far more accurate than most other media channels, by virtue of the personal information users hand over while using it. Many advertisers pay between $1-$2 every time a user clicks on an ad, which is in the same range paid to Google for less-targeted results.
With Facebook, "you could target single people under the age of 34 who live in Toronto," suggests the social media consultant Mark Evans. He noted that when his client The Kit, a Web-based women's beauty magazine based in Toronto, prepared to launch last year, Facebook was able to serve up ads only to the 120,000 users whose previous activity suggested they would be interested in learning about the site.
Just as important, advertisers only pay if a Facebook user clicks on an ad. The Kit paid what Mr. Evans calls "a nominal amount" for ads that generated about 500 click-throughs, but the ad was generated about 2 million times. "Two million people saw that ad," he said. "I think there's a double bang for a lot of advertisers."
The Goldman investment puts more pressure on Facebook to finally launch an initial public offering, something investors have been eagerly awaiting for years. In the U.S., the Securities and Exchange Commission requires private companies to effectively list publicly when more than 500 outside individual investors own the company's equity. Although Goldman plans to act as a single investor, the bank is in reality acting on behalf of what may amount to thousands of clients. As such, the SEC may move to force Facebook, whose shares currently trade on a number of so-called secondary markets, to go public.