IPWoah

For the past 10 days, I’ve been inundated with news on the Facebook IPO. After the first estimates placing the value of the company somewhere near $100 billion surfaced, it seemed every paper I came across had joined a pact to publish daily information, opinions and anecdotes relating to — and spreading — this monstrous prediction. In some cases, the figure shot as high as $120 billion. And yet, beyond these endless eye-grabbing headlines, coverage from The Atlantic to The Economist to Bloomberg to CNN was saying “100 Billion? No way!” In fact, everyone I spoke to was scoffing some form of “yeah right” at these predictions. In an online poll conducted by The Economist, 82 percent of voters thought $100 billion was an over valuation of Facebook.

And there was ample evidence — reported by reputable financial sources — supporting the claim that Facebook simply isn’t worth that much money. The New York Times claimed that Facebook derives its value from being a “data machine that captures and processes every click and interaction on its platform.” But even so, The Atlantic and Bloomberg found that Facebook’s per user revenue is actually as low as $4.39 or $5.02, respectively.

The Atlantic continued to suggest the only ways in which Facebook is poised to reach a valuation of $100 billion would be by tripling the number of users worldwide or by significantly increasing both advertising and Facebook payments. However, each of these will be difficult to do. Most people who would join Facebook have already done so and increasing ads will likely significantly change the feel of the site, possibly decreasing usership.

These notions are easy enough to grasp and look at IPO valuation in a standard and logical way. So what generates the disconnect between this readily available information and the daily news stories’ projections?

I think the answer is this: all public knowledge of Facebook is that it is a very popular, culturally salient site. It is easy for the general public to translate this popularity into value. Alongside its reduced value projection, Bloomberg also reported on Feb. 2 that in the last quarter of 2011, 57 percent of Facebook users visited their profile on a daily basis.

So, to those who aren’t thinking about Facebook’s revenue per user, or the challenges of their growth potential, it becomes easy to conflate value with popularity. A few years back, The Economist published a piece examining “the Facebook nation,” which looked at the ways in which the community of Facebook users resembled a national population. With its 845 million users, Facebook would be the third largest “nation” in the world. And now, investors have been given the opportunity to buy a publicly traded share in this “nation” of a site. Tempered, rational pacing is out the door, and valuations begin to run rampant.

And though it’s clear that we should know better and that we understand Facebook isn’t truly worth that much, I bet the shares will sell at the outrageously predicted price. The pieces are all there; Facebook’s salience in public opinion will overtake rational judgment. A piece by Daily Finance published on Feb. 2 talked about the “mispricing of the stock” that results from selling stakes in a “high-profile company to hyped-up investors” — the author predicted an inflationary bubble which will distort, until it inevitably pops, Facebook shares as they are freely traded. He compares this little Facebook bubble to the dotcom bubbles of the late 1990s.

While I think there are substantive differences between the dotcom bubble and the Facebook IPO, I think the sentiment behind the comparison is quite right. The dotcom bubble grew from an excitement for the potential of Internet sites. The problem was not only this misleading level of excitement but also that investors were making projections for a medium they didn’t really know. Much like this lack of familiarity in the dotcom bubble, most of those making predictions for Facebook’s value aren’t the most acquainted with what Facebook is and does. They may know the figures, they may even have a profile — but it’s our generation that Facebook was created to target and it’s our generation that it continues to target with each change to the site.

I’m inclined to believe that the disconnect between press and informed opinion comes from the fact that the generation making valuations and news stories has no real idea how Facebook fits into the lives of the main, mostly young, users. We in the target audience — namely, college users — however, don’t fall into this because we aren’t blinded by sci-fi style fanaticizing about the future of Facebook. We know that it’s not going to become a Google, Visa or UPS (some of the top 10 highest IPOs) because we have better grasped the extent of its influence and potential for growth. It’s not that we can see some secret the rest of the world can’t, it’s simply that they’re still a little gripped by dotcom infatuation. We, on the other hand, have an advantage of familiarity that allows us to avoid falling into this trap. While the initial suspense (the question of total IPO revenue) will be resolved tomorrow, the dangling question of who was right (the undervaluing financial quants and college Facebook users, or the overvaluing general public) may take months to settle.

Lily Alberts is an economics major from Nashville, Tenn. She can be reached at lalberts@princeton.edu.