“Never give a sucker and even break; never wise up a chump” — WC Fields

Facebook does not need anymore investment capital. It has raised several hundreds million in the last year. The company was profitable last year on an estimated $800 million in revenue. The figure is likely to grow this year as the company adds millions of new members each month.

Hapless investment firm Elevation Partners, in which U2’s Bono has a large stake, will buy five million shares in Facebook for $120 million. It may be another example of the private equity buying at the top of a company’s potential and then riding the valuation down to a sharp loss.Elevation bought 2.5 million shares in Facebook last year for $90 million.

Facebook has been valued as high as $15 billion and carries a value of about $10 billion now, which would be about 14 times revenue and almost 100 or 200 times operating profit. The company is as large as Yahoo! in terms of traffic, but the search portal’s sales were $6.4 billion and the company made $386 million in operating profit. Yahoo!’s market cap is about $20 billion.

Facebook’s advocates would argue that the company is growing quickly and Yahoo!’s growth rate is in the single digits. That may be true, but Facebook is still having trouble monetizing its traffic. The amount it charges marketers for a thousand ad impressions is a tiny fraction of AOL (NYSE: AOL), MSN, or Yahoo!’s rates

Facebook revenue-generation problem is simple but hard to solve. Its users cannot be easily categorized the way portal visitors can be based on which part of the portal’s content they use. Facebook members have interests that cannot be pinpointed. That has caused the world’s largest social network to collect data on users to target marketing message, which  has caused an uproar among its members and privacy advocates.

Facebook may be big, but its future in uncertain. Elevation Partners is backing another company, like Palm, Forbes, Yelp, and Move.com. It is reasonable to argue that each of these investments has been a failure. Facebook may fade as it has trouble building sales. It will not be worth anywhere near its current value of $10 billion.

Douglas A. McIntyre

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