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An Investment Mistake-One Should Never Make

An Investment Mistake-One Should Never Make

Clearly, no other cult has grown as much in recent times as Facebook. At last count, the social networking giant had membership that had swelled to a mind numbing 500 million. To put things in perspective, if thought as a separate nation, Facebook would be the third largest country on the planet.

Quite certainly then, if a firm of the calibre of Facebook is coming up for listing, one would certainly want to invest in it. But there is a small question that begs itself. To what extent would one be willing to go to become a shareholder in the company? Surely not to the extent that Goldman Sachs has gone we believe. Apparently, the world’s largest investment bank has picked up a stake in Facebook that values the latter at a whopping US$ 50 bn!

Allow us to tell you why we think this one of the most ridiculous deals we have seen in recent times. You see, Facebook is expected to generate revenues to the tune of US$ 2 bn in 2010. Thus, Goldman Sachs seems to be valuing Facebook at an exorbitant price to sales multiple of 25 times! To give an indication, Google, which generates nearly 1,300% more revenues than Facebook trades a price to sales multiple of just 6.5 times. Mind you, the fact that Google’s multiple also looks extraordinarily high is not even being considered here.

If you thought that brokers and investment banks like Goldman Sachs have your best interests in mind, this example would perhaps force a complete rethink. Make no mistake, by way of underwriting fees and its marketing and sales muscle, Goldman Sachs will no doubt make money from the deal. It will also try and ensure that when the IPO hits the market, the total valuation of Facebook is even more than US$ 50 bn. It is up to you to decide whether deals like these make any sense to you. As per us, such investments should be avoided at all costs. After all, isn’t margin of safety the cornerstone of investment success?

An Investment Mistake-One Should Never Make

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