> How does Google make money?
Targeted advertising on search queries. Notably, people don't tend to ignore that quite as much.
Google is probably overvalued on their current business model too, but they don't have the reputation hit that Facebook does, and they do have the engineering talent to diversify. For instance, licensing software to build self-driving cars would also be lucrative. Google Glass would be lucrative as well.
> Talk about hand-waving. Have you actually done this?
OK, looking back, I overstated it a bit. Facebook's valuation makes sense if the entire world population were active Facebook users, but almost only then.
The most optimistic projection for Facebook's revenue is 5B for 2012, on less than 1 billion active users. Population of the Earth is just less than 7 billion. So let's magically sign almost all of them up for Facebook; that's 35B revenue, which is roughly a third of their valuation. (Well, not really--they aren't going to be as affluent as Facebook's current American and European users, so it won't be as lucrative to advertise to them.) Apple's annual revenue is about a sixth of their valuation. But Apple has a successful history of growing significantly new product categories, having introduced three in the last ten years. And Facebook doesn't have the entire world population signed up yet--presumably if they did, their valuation would rise more.
> Anyway, the burden is not on me to prove how Facebook's revenues can justify their market cap.
So it's up to me to prove a negative then?
> They are still growing, and they're control over key portions of the internet is still increasing. There is absolutely no justifiable reason to believe that their current advertising model is their endgame. Google is obviously scared shitless of them enough to completely retool their entire strategy, and they are not exactly small potatoes.
> I'm not running out to buy Facebook stock, but I think if you want to dismiss Facebook's valuation you need a stronger argument than "their current ad revenue doesn't scale".
More handwaving. Google became an advertising company twelve years ago and that's still the bulk of their business. Is Facebook somehow more likely than Google to build a new revenue stream in a shorter period of time? Are they more likely than Amazon to build new revenue streams, when Amazon has consistently and repeatedly done just that for 18 years?
There's a lot of upside open to Facebook, and nearly all that upside is priced into their stock. But there's also a lot of downside, none of which is priced in. Which is probably the defining characteristic of a bubble valuation.