04 May Is Facebook Worth $100 Billion?
Not-so-recent buzz around Facebook has got the whole M&A world awash with speculation, but it appears they’ve nailed down an offering price for the public shares which at this point looks like a range from $28 $35 Bln which would value the company at upwards of $86 Bln. Along with the buzz, I saw another article today that boasted the young Zuckerberg would now have a war chest larger than Steve Ballmer’s to mess with. Pretty impressive. But is the company really worth $86 billion? Is it all just hype?
I ran some numbers earlier this year after looking at some of the recently filed SEC documentation. Depending on the assumptions one makes about growth, attrition and the revenue recognition per customer, the company may not be too far off it’s mark. The range is anywhere from $50 billion to over $110, depending on the assumptions one makes. If you do it based on comparable companies and are highly risk averse–removing outliers–it appears Facebook hits at about $50 billion.
Based on the analysis, I would expect the Facebook IPO share price to be at or near $16 per share. This gives Facebook a valuation of around $30 billion assuming there are 1873 million outstanding shares.
In calculating the underlying value of the shares issued in the initial public offering of Facebook, I considered a number of potentially comparable firms, including online technology, retail and web advertising firms. The comparable firms were considered for their business type and were compared using numerous figures of merit. Our discussion also considered Facebook’s potential for growth in
comparison to recent similar IPOs such as LinkedIn and Zynga. I compared current revenue per customer (registered user) for Facebook vis-à-vis the more nascent comparable companies and those more established who’ve had considerable more time to extract value from active users.
This discussion proved most interesting as I noted the recent high valuations for Zynga and LinkedIn whose businesses most closely resemble that of Facebook. If analysts and investors expect Facebook to add more users and, more importantly, extract more value from existing users over time, then more weight would go toward the Zynga or LinkedIn IPOs as valid comparables as they would be more reflective of a continued high-growth trajectory. But, I considered LinkedIn and Zynga as overvalued and as outliers for many of our multiples.
Finally, I decided to choose the following comparable companies categorized according to different factors:
1. Display Ad business and online marketing services: Google, Yahoo, AOL, Microsoft, Disney,
LinkedIn and ValueClick
2. E-commerce business and payments business: Zynga, Amazon and eBay.
While I considered several traditional quantitative and qualitative units of merit in our assumptions analysis, I also took into account some non-traditional qualitative comparisons which included Price/Sales, Enterprise Value/User and Enterprise Value/Employee. These helped us to see and compare the value drivers for Facebook, but also indicated that, while there are many similarities, there is no such thing as a perfect comparable firm. As such, I chose to weight the comparable multiples according to both qualitative and quantitative qualities, which I felt gave us a more rounded indicative view of the underlying value of the company.
Applying multiple to Facebook’s numbers, I came with a range of IPO share prices. I believe the price range around $16 is more accurate and a better representation of Facebook’s business. But, to be fair, I’m biased toward conservatism on these things and this has the panache and smell of a large deal. Hence, I’m sure with the IPO “pop” we could see the unthinking $100+ billion.