Facebook is expected to file a $5 billion initial public equity offering implying an estimated company valuation of $75 to $100 billion. According to Facebook, the site has 800 million registered users and over half of these users log-on to Facebook at least once per day. In addition, 80% of these users are from outside of the U.S.
Clearly, Facebook has a global reach and an active audience, however can Facebook live up to its valuation expectations? Does “users” = “buyers”? Do markets believe that Facebook should be valued in the range of these other U.S. companies?:
| Company | Market Cap ($bn) |
| Exxon Mobil | 419 |
| Apple Inc | 392 |
| Microsoft Corporation | 249 |
| Int’l Business Mach. | 222 |
| Chevron Corporation | 213 |
| Wal-Mart Stores | 209 |
| General Electric | 202 |
| Berkshire Hathaway | 198 |
| Google Inc. | 190 |
| Proctor & Gamble | 182 |
| AT&T Inc. | 181 |
| Johnson & Johnson | 178 |
| Pfizer Inc. | 168 |
| Wells Fargo & Co. | 161 |
| Coca-Cola Co. | 155 |
| Oracle Corp. | 144 |
| JPMorgan Chase | 140 |
| Intel Corp. | 134 |
| Merck & Co. | 119 |
| Cisco Systems | 107 |
I am skeptical of Facebook’s ability to grow into the aggressive valuations that the sell-side analysts are forecasting. It is hard to understand how Facebook can command anywhere near the valuations of these companies listed above.
When I take a look at other tech-company comparables such as LinkedIn and some of the rosey assumptions made by Wall Street I continue to be uncomfortable with jumping in on an over-heated Facebook IPO.
What are your thoughts on Facebook’s offering? Is buying the IPO shares a wise investment or just jumping on the band-wagon of another over-valued “Hot Wall-St. IPO”?
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The valuation is certainly stretched, although I admit that great technology companies are often underestimated in the early stages. In the end, however, I just can’t invest in a company where 57% of voting stock is controlled by one person.
Facebook has enormous potential considering the fact that social media will drive more online and mobile business leads for major corporations around the globe. Facebook has more subscribers than any other online giants including Google. So, valuation is about the perception. But, I agree that initial euphoria will die and you can purchase stock at more attractive level later on.
I certainly agree that Facebook has a massive user-base, however I am not quite sure of their monetization strategy (and neither is Facebook). I also think that Google is much more diversified than Facebook in terms of product set. Yes, Google’s ad revenue accounts for 90%+ of total revenue, but I think Google has more paying customers and more opportunities/products available to obtain paying customers, which is evidenced by their $30+ per user in revenue vs. Facebook’s ~$2 per user. Although, I will cut Facebook some slack on this point since they are the newer firm. I don’t think it makes sense to over-pay for the potential to tap into 835MM users… I’d be willing to pay 25x or 30x earnings, but not 100x.
You make a good point about users vs. buyers. They don’t necessarily equal each other. I do think advertising will still be huge on Facebook and that it will continue to grow. As each generation is born, more users will sign up and it will be a global platform to reach people with a message. With this in mind I think it will hold value of over time and that investing in it may not be such a bad idea. This is the first time that people are the product- socialization is now something that makes money. Who would have thought?
I think there is certainly great potential at Facebook, however 2011 net income was $1bn, to say that the company is worth 100x its 2011 net income is a stretch. Does that mean if 2012 revenue is $3bn that Facebook will become the biggest company in US valued at $300bn? The valuations can get ridiculous. Also, it is hard to imagine that Facebook could beat out Google.
How does Facebook make money? I’m not on facebook and I’m not in finance so I don’t understand how this works. Are they making all their money from advertisements?
Advertising account for 85% of Facebook’s revenue last year, so Facebook is certainly dependent on advertising to survive and thrive. However, I just learned that advertising accounts for 96% of Google’s revenue. Adsense and Adwords are likely responsible for the bulk of these revenues.
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I agree. I don’t know how much more Facebook can grow, although Zynga’s contribution to its revenue was surprising.
Right 12% ($444MM) of Facebook’s revenue came from Zynga, that is a big number…