Marking another major milestone, Facebook's worth is believed to have surpassed eBay's to become the third most valuable Web business in the United States.
According to it's value on SecondMarket, an exchange for shares of privately held companies, the social network is now worth about $41 billion based on $16 per share price -- more that eBay's $39.3 billion valuation on Nasdaq. (Google, valued at $192.9 billion, and Amazon, worth $74.4 billion, still lead the way.)
Suggesting that the valuation is valid, Forrester analyst Augie Ray tells Bloomberg: Facebook "has in fairly short order -- just a couple of years -- gone from being a very niche site to one where the majority of Americans spend a great deal of their online time."
In what is perhaps the understatement of the century, Business Insider concludes: "The future for Facebook looks bright," adding, "It is the primary place on the web people spend time."
Still, "None of this really matters until Facebook goes public," ReadWriteWeb reminds us. "This isn't the first time we've seen reports regarding Facebook's supposed valuation ... In March, for example, The Wall St. Journal talked to several investors who were anticipating a market capitalization of $35 to $40 billion for the social network, given a 2011 IPO."
Calling such lofty valuations "risky," Mashable warns: "One only needs to look back at MySpace and how quickly it fell from a social networking powerhouse to a has-been."
While downplaying the numbers as "fundamentally speculative," Facebook sources are predicting sales of at least $1.4 billion this year -- up from about $800 million last year. By comparison, eBay's revenue is expected to top $9 billion this year, Mashable notes.
Yet, just based on those privately-disclosed numbers, analysts believe that Facebook has put an end to any remaining marketer concerns about social media. Citigroup analyst Mark Mahaney tells Bloomberg: "As an advertising platform, Facebook has been proven."
COMMENTARY: I hate speculating on the valuation of startup companies that do not publish their revenues and profits, even a company like Facebook. Too many factors go into the business valuation. In the case of Facebook there is just too much hype. This always worries me. Let's take Facebook Places, for example. Only 4% of consumers are using location-based check-in services. Of those that have signed up for location-based check-in, only 11% use it at least once a week. Hardly, the kinds of numbers you want to hear.
Facebook shareholders were happy to sell at $16 per share, the price that SecondMarket used for Facebook's valuation, but those sellers represent a very small percentage of the total shares outstanding, so the valuation maybe significantly less than $41 billion.
At the end of March 2010, SecondMarket valued Facebook at $16 billion, so in only eight months the value has risen 256% percent. That's just crazy, too much of a swing in Facebook's valuation in just eight months. Kind of reminds you of what happened to real estate prices doesn't it? Neither the DOW or S&P 500 have experienced those kinds gains in value. When Facebook's valuation is compared with other internet giants like eBay, LinkedIn and Google, it just doesn't make economic sense. The numbers just don't add up. Something is really rotten in River City.
If we used a price earnings multiplier model, and using Google's P/E multiplier of 22x EPS as a benchmark, Facebook's valuation would be as follows:
- Various experts have forecasted that Facebook will do $1.8 billion in revenues for 2010. That number was derived from Vitrue, which in April 2010 calculated the economic value of a Facebook fan at $3.60.
- If you multiply $3.60 x 500 million (Facebook's current membership) this yields $1.8 billion. With me so far? Assuming that Facebook yields a return of 10%, this would put their net profit at roughly $180 million.
- Facebook has a total of 2.562 billion shares outstanding taking into account three stock splits. If you divide the $180 million by 2.562 billion you get an EPS of $0.07 per share.
- Using Google's P/E multiplier of 23.77 as of 11/16/10, Facebook's price per share should be about $1.66, but according to SecondMarket the price per share is $16.00 or 9.6 times higher. That's quite a premium, don't you think?
- If you assume that SecondMarket knows what they are doing, then Facebook's P/E ratio would be on the order of about 228x EPS, calculated as follows: $16.00/.07 = 228. That number does not make any sense to me either.
- How can Google's PE ratio be 23.77x and Facebook's be 228x? Google is a public company, the market has set its price per share at about $584 per share (as of 11/16/10) and the company has a total market capitalization of roughly $188 billion. Facebook is still a startup with most of its shares trading through SecondMarket. No comparison to Google.
- If we use the $1.66 I calculated as Facebook's price per share, then Facebook should only be valued at roughly $4.253 billion. This is 9.6 times less than SecondMarket's valuation of $41 billion.
In conclusion, SecondMarket's Facebook valuation of $41 billion simply does not make sense when you use a price earnings valuation model. Facebook's EPS is $0.07 per share and its PE multiplier is 228. Google's EPS is $24.71 and PE multiplier is 22. I have estimated that Facebook's earnings for 2010 will be $180 million. On the otherhand, Google's estimated earnings for 2010 will be about $8 billion or approximately 44.44 times grater than Facebook's.
Acording to Augie Ray, the value of Facebook on New York-based SecondMarket has more than tripled in the past year, according to the person, who declined to be identified because SecondMarket doesn’t publicly release trading data. SharesPost Inc., another private exchange, estimated Facebook was worth $40.9 billion last week. That’s up almost 50 percent in the past month, according to the Santa Monica, California-based company.
Valuations of closely held companies are less precise than those of their public counterparts because trading is limited to a smaller pool of investors and fewer shares are available. Facebook also doesn’t disclose financial information.
Courtesy of an article dated November 15, 2010 appearing in MediaPost Publications Around The Net
Comments