Is Facebook’s valuation in trouble?

by Ryan Streeter on May 16, 2012. Follow Ryan on Twitter.

Holman Jenkins’ words on Facebook in today’s WSJ are timely given the GM announcement that it will stop advertising on the social networking site because the ads don’t pay off:

Nobody values Facebook on the scalability of the ad business that generated $3.2 billion in sales last year. The road show before the road show was a Facebook presentation to advertisers in March promoting “sponsored stories” as a new way to shove ads into users’ news feeds. It was, ahem, unconvincing if the idea was to show how Facebook might generate sufficient ad revenue to justify a $100 billion market cap when the company goes public Friday.

I have been among the Facebook skeptics from the beginning. Admittedly, this is partly owing to the fact that I simply┬ánever “got” Facebook’s value – not the value the investors are looking at, but the value users place on it. The shocking exhibitionism by otherwise conservative people I know who share pictures of their kids and disclose their whereabouts with so-called “friends” they honestly don’t know that well has always turned me off. This isn’t Facebook’s fault. But, unlike Twitter, Facebook is basically set up for this kind of activity. And I’m personally just not that interested in that kind of activity. I appreciate all the good stuff – organizing pro-democracy movements, building support for political candidates, and so on. But I find trolling through what my “friends” are doing to find the few things that are truly interesting becomes a time-killer for me….so I just don’t do it that much.

Having engaged in a little exhibitionism there myself – namely exposing my almost-certain shortsightedness about the site’s value – my sympathy with Jenkins’ critique of Facebook’s valuation may fall flat (I thought it important to put my biases out there, though, since I’ve shared them privately with many people who, if they read this, would think I was just digging at a tool I happen to dislike personally).

But, if we’re honest, it’s not clear that Facebook’s boosters have provided a compelling counterargument to Jenkins’ critique, which is summarized in his opening paragraph:

Whatever valuation the market puts on [Facebook], that valuation won’t be based on any theoretical extension of Facebook’s existing revenue model. It will be based on Facebook finding ways to make money that haven’t been demonstrated or articulated yet.

That, to me, is the essence of what is happening with Facebook this week. If Jenkins is wrong (and, if by extension of my sympathy with his view, I’m wrong), I’ll happily confess ignorance as I’d really like to see how Facebook – or something like it – can reach the expectations people have for it. But so far, I’ve not heard the compelling case.

When I share my views with friends, I usually get very strong pushback from them – as it seems they mainly all get much more use out of Facebook than I do. If my small nonscientific sample is any indication, Facebook devotees register high on the passion scale. And that’s good for Facebook if it can find a way to monetize the behavior that the passion produces online.