Big business news recently has been the listing of Facebook and there is still a lot of attention to its share price. The shares are currently trading at $32, below the listing price of $38. It is going to be a share that I will follow closely, because I want to see how it does, even though I really don’t believe there is any value to Facebook shares. Throughout history, when people have overpaid for a share, they have been burnt and determining whether you are overpaying or underpaying can only be done with reference to what a company is worth. To know what a company is worth you have to look at the cash it is generating and what its profits are, and Facebook really does not do very well in that regard.

In other words, all the people that are effectively valuing this company at a $100 billion in total (calculated by taking the share price and multiply it by all of the shares out on the market), are taking a huge bet that although Facebook is not making much profit now, it is going to grow into one of the most profitable companies. There are a number of ways that Facebook can increase its profits, but to get the profits to the levels that the share is indicating, they are probably going to have to increase their profits 10 or 20 times and I think that is too much of a stretch.

It is a website that has been around for many years now, it has grown to a tremendous size and if they have not, in all this time, managed to turn it into huge profits, I cannot see that they are now suddenly going to multiply their earnings by 10 or 20 times. I am also a little bit of a cynic in that typically speaking people who have very profitable companies don’t make shares available to other people, and prefer to keep them private and given that Facebook does not really need to raise any money to continue expanding its numbers, the only reason for listing on the Stock Exchange has to be for rewarding all the people who either work for them or have invested in them and you reward them by allowing them to sell their shares to others at a substantial profit. They are not all going to want to have every cent of their wealth committed to Facebook, and so I think you could expect to see a lot of sellers.