Facebook valuation silliness

Those who forget the past are surely doomed to repeat it - TechCrunch:

The SecondMarket Facebook shares auctions are back on after a holiday break, and the valuation is up big time. The last auction prior to this one closed December 15 at $22.75/share. Today it hit $28.26 per share. With 2. 5 billion or so shares outstanding, that’s a $70.65 billionish valuation. A month and a half ago shares were trading on SecondMarket at a $50 billion valuation.

If anybody recalls as far back as 2000, the gig then was to IPO a tiny amount of the company's shares, the resulting scarcity forcing the price higher and higher as overhyped shares were bought by people with more dollars than sense. And that was at least in an open market on NASDAQ!. When you get to a point that a company with un-audited books can be accepted uncritically as being worth $70 bn then you have to either believe in a New Economic Paradigm, in the Wisdom (Madness?) of Crowds, or that just perhaps a good old fashioned Pump n Dump scheme is on the go - Wikipedia.

Pump and dump schemes tend to take place either on the Internet including e-mail spam campaigns or through telemarketing from "boiler room" brokerage houses (for example, see Boiler Room). Often the stock promoter will claim to have "inside" information about impending news. Newsletters that purport to offer unbiased recommendations then tout the company as a "hot" stock. Messages in chat rooms and email spam urge readers to buy the stock quickly.

Unwitting investors then purchase the stock, creating high demand and raising the price. This seemingly "real" rise in prices can entice more people to believe the hype and to buy shares as well. When the people behind the scheme sell their shares and stop promoting the stock, the price plummets, and other investors are left holding stock that is worth significantly less than what they paid for it.

Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stocks," generally traded over-the-counter (in the United States, this would mean markets such as the OTC Bulletin Board or the Pink Sheets), rather than markets such as the New York Stock Exchange or NASDAQ—because it is easier to manipulate a stock when there is little or no independent information available about the company.

So, to reiterate - tiny numbers of shares changing hands in shadowy secondary markets do not constitute price discovery, despite the promises of promoters, and using them as a basis for valuation of Facebook is about as logical as discovering witches by seeing if they float like ducks (Cue Monty Python sketch above). I really thought Mr Arrington/TechCrunch recalled all this, but this article makes one wonder......

(Our view of what you have to believe for a $50bn valuation is over here - do you believe it?)