Remember the dot-com bubble

How can a company with estimated profits of $335m to $1bn possibly attract a market valuation of $100bn?

That is the question currently posed as we expect to see Facebook launch their Initial Public Offering (IPO) later this week.

If those numbers prove to be accurate, the valuation will be supported by hype rather than reality.

It is bound to invoke memories of the dot-com bubble between 1995 and 2000, when markets expected profits to materialise from previously unproven business models.

Facebook is likely to argue that its value lies in the user base.

More than 800m people globally are reported to have active Facebook accounts. The personal data they share is valuable to advertisers, who can personalise their messages to individual users.

But are Facebook users really worth an estimated $125 each?

If the IPO goes ahead as expected, it is not going to be based on a conventional valuation model.

Investors will need to suspend reality for a while, and convince themselves that Facebook is worth more than (for example) Apple, with its ample profits and long history of success.

Photo credit: Flickr/_Max-B