Hot on the heels of Microsoft's $240 million purchase of a 1.6 percent equity stake in Facebook—which values the social networking startup at $15 billion—comes word that the hedgies are getting into the action.

Elizabeth Corcoran at Forbes.com reports that two New York-based hedge funds have each contributed $250 million to Facebook's current financing round—using the same valuation as Microsoft—bringing the three-year-old startup's cash haul to about $750 million.

Facebook is expected to earn $30 million this year on $150 million revenue.

In other words, three investors have spent $750 to acquire a collective 5 percent stake in a company that is expected to earn $30 million this year. As the Wall Street Journal's Dana Cimilluca points out, that values Facebook at 500 times expected 2007 earnings.

Ladies and gentlemen of the jury, this is ludicrous. It's time for a reality check.

Wired's Fred Vogelstein crunches some numbers to figure out what Facebook would have to earn to justify a $15 billion valuation, were it a public company.

Assuming Facebook's stock traded at 56 times 2008 earnings—that was Google's P/E ratio shortly after its initial public offering—Vogelstein concludes that Facebook would have to have earnings—not revenue—of $270 million.

"I think social networking will change the way the world uses the Internet, and Facebook certainly has an early lead in that race," Vogelstein writes. "All that said, for a company with current revenues of only about $150 million, virtually no profits and plans to double its staff to 700 in a year, $15 billion seems a little . . . er . . . frothy, no?"

That's putting it mildly, Fred.

Sure, for Microsoft, $240 million is chump change, and the deal is much more of a strategic play, rather than a financial one, as Portfolio.com's Felix Salmon points out.

But exactly what does Microsoft get for its $240 million, 1.6 percent stake? Other than bragging rights that it finally beat Google at something?

I'm sure Steve Ballmer was quite pleased with himself to be able to announce the deal on Google analyst day, but after the celebrating is all over, what is he left with?

A 1.6 percent stake in a company with almost no earnings. Well done, Steve.

As Felix points out, a 1.6 percent stake in Facebook does not constitute an Internet strategy.

Cimilluca suggests that the way to view Microsoft's investment is "as a 'stocking fee' or 'soft kickback' for ensuring Microsoft's ad-placement technology stays relevant."

"That would make the Facebook valuation largely irrelevant," Cimilluca writes, "almost like a hopeful call option with an unspectacular coupon attached. Or at least, that's the way they may be justifying it up in Redmond."

At any rate, all the discussion in recent weeks about Google and Microsoft in a bidding war for the Facebook stake has been misleading.

It's been clear since the outset the Microsoft really wanted the stake, while many people never thought that Google was really serious about it.

Google earns $4 billion annually—and its profit is growing. Facebook is expected to earn $30 million profit this year. Regardless of how fast Facebook is attracting new eyeballs—and its traffic growth, at least, is the subject of debate—it's hard to imagine that the gang at Google is losing much sleep about it.

Both Salmon at Portfolio.com and Nick Carr at Rough Type point out that it's easy to get worked up the $15 billion valuation. Carr, in particular, views extrapolating Facebook's "true worth" from Microsoft's investment as "a ridiculous exercise."

As one hedge fund analyst told me today, "There is no way to use conventional metrics to justify $15 billion."

by Sam Gustin