The last few days has been pretty interesting.  West Ham had a tough match, but eventually managed to go back up to the premiership (come on you irons!).  Chelsea won the champions league final by the skin of their teeth and my baby daughter Sophie had her first ever attempt at using her baby walker.

However in the business world the big news of the past week or so has been the flotation of Facebook.  But before I talk about this….a quick disclaimer.  Just to be clear…nothing in this entry constitutes professional advice.  It is purely my reflections on the Facebook initial public offering.

As manyof you know….I think social media is great!  I’ve written recently on my thoughts about how potentially powerful it is here.  However at the end of Facebook’s first day of trading the company was valued (based on the share price) at one hundred and four billion dollars.  That’s right….you heard right – $104 billion.  However, is this valuation justified?  Whilst there a many indicators to an appropriate market valuation, one key factor is to look at Facebook’s current profits.  Whilst profits are pretty impressive at $1 billion per annum…valuing a business at 104 times profits is ridiculous in anyone’s book.

The markets have already realised that Facebook was initially overvalued and as of today (22nd May) the share price had reduced significantly and had reduced the market capitalisation down to 72.75 billion at time of writing.However lets make a comparison to the SME community and perhaps your business.  Let’s assume that you have a business which earns £200,000 a year in profit.  You decide you want to sell your business and approach a number of people to purchase your business.  Would any of them pay you fourteen and a half million pounds for your business?  Whilst you may be happy to accept…would you consider this a massively overly inflated valuation?  I would!

Facebook may argue that the valuation is justified due to the fact they have an estimated 900 million users as well as having quite detailed information about their users.  They also have a powerful brand name together where many users spending the majority of their time on the internet on Facebook.  However this argument still doesn’t justify the valuation at all and seems to ignore one key point.  People can stop using Facebook regularly and move onto the next big social media platform.

Whilst platforms like Myspace are still incredibly popular there has been a gradual trend of users gradually becoming more active on Facebook and therefore ignoring Myspace.  Who’s  to say this won’t happen to Facebook when the “next big thing” comes around the corner and users start to using these new platforms as their main preference.  Whilst the Facebook leadership team are obviously pretty savvy and have been smart enough to roll with the punches over the last few years, a gradual erosion of their user base moving to Twitter, Pinterest, Google plus or even a social media platform which you haven’t heard of yet but may be an integral part of your lives in the next few years is absolutely possible.

Also, we’ve previously had the experience of the “dot com bubble” at the turn of the century which we should have learnt lessons from.  Effectively many of these companies were overvalued and as technology changed found themselves floundering on the market.  Could this happen to Facebook too?

As ever, I’d like to understand your thoughts on this….is Facebook overvalued?  Will it ever justify it’s market valuation?  or is Facebook’s valuation fair due to the amount of data it holds on it’s users?  or is it too early to say?  I look forward to hearing your thoughts.