Is Facebook Worth $100 Billion?

How about $234 billion, as one analyst believes? Or any other astronomical number you choose? Valuation is a mix of art and science. Oh, and self-interest and greed and desire and, well, you get the idea. Statistically, nothing that has happened in the past is predictive of what might happen in the future. Everyone is guessing. Some guesses are educated. Some people are just, in Wall Street parlance, 'talking their book.' In other words they have a vested interest (their book of investments) and they are talking this up because it might raise the value of their own bets.

There are lots of ways to value a company. There are no rules or regulations. LinkedIn's IPO was considered extraordinary, but a lot of the run-up was from banks doling out shares to favored clients in return for past services or future business. Whatever number at which Facebook eventually goes public is not the point for most owners, employees and investors. It is what that price will be a few months later. Stay tuned. JL

Shayndi Rice reports in the Wall Street Journal:

Facebook Inc. has become Exhibit A for the skyrocketing valuations of closely held Web companies. The Palo Alto, Calif.-based social network was valued at $15 billion in October 2007 when Microsoft Corp. invested in the company. By this January, Facebook commanded a $50 billion price tag when Goldman Sachs Group Inc. led a $1.5 billion funding round in the company.

Today, transactions of Facebook stock on private marketplaces value it at about $84 billion. Some people believe that if Facebook goes public next year, it will trade at a $100 billion valuation, more than the market capitalizations of Hewlett-Packard Co. (currently at $74 billion) and Amazon.com Inc. (at $97 billion). A Facebook spokesman declined to comment on valuation.

The soaring numbers put Facebook at the head of a pack of Internet firms that have snagged huge valuations in short periods. Groupon Inc. and Zynga Inc. both recently filed to go public in debuts that some expect will value them at $20 billion each.

Whether these companies—and Facebook in particular—merit such valuations is up for debate. The Journal talked to people from Main Street to Wall Street to weigh in on what Facebook is worth, editing their remarks for clarity. It also visited two young companies with growing valuations.

Worth Nearly $140 Billion by 2015
Geoff Yang , 52 years old, venture capitalist at Redpoint Ventures in Menlo Park, Calif., which invests in social Web start-ups.

Facebook] creates an entire ecosystem, what people are calling the social Web. Pretty much every high-value revenue category that we learned about on Google will be rebuilt on top of Facebook. Facebook has the potential to be worth as much, or arguably more than Google because of the scope and viral growth potential.

I look at it in a number of ways.(I'm not being exact. This is just a ballpark estimate.) One, the online advertising market was $25 billion last year. Facebook's share is about 27% of display ads right now. In 2015, that suggests an online ad market of $45 billion. That gets you to $7 billion in revenue of display ads for Facebook.

Second, is that the local ad market is just an enormous piece. Today, it's $133 billion in revenue and the Internet is getting an increasing share of that. Let's say that increases to $150 billion by 2015, and the Internet takes 20% and Facebook takes 20% of that. That's another $6 billion in revenue.

Then there's the international component. Typically, international is double U.S. revenue. That's another $4.8 billion. Then there's Facebook Credits (Facebook's virtual currency system). Let's say they do $1.3 (billion) in 2015. Put that all together and that's $19 billion in revenue by 2015. I think this is a really attractive margin business, so I give it a 40% pretax margin. I put a P/E ratio of 25 [price to earnings ratio, which measures a company's share price against its earnings per share] and I get just under $140 billion in market cap in 2015.

Pressure on Management Team
David Peterschmidt , 63, founding CEO of Inktomi Corp. in 1996 , a dot-com-era search engine, and now CEO of IT-services firm Ciber Inc. in Denver.

Having been the CEO of a company that came out with a $20 stock price—and two or three years later found itself at a $265 stock price—is that it puts tremendous pressure on the management team. We would update our plans every six months. The first five minutes of every strategic-analysis meeting were, 'what's the GAAP analysis?' Or, 'what is the difference between the valuation today and profitability we can project over the next few years?'

As that valuation expands and it gets out in front of reasonable multiples, that puts a lot of pressure back on the management team in a couple of different directions.

I don't know [about Facebook's valuation], but there's a difference betwen Facebook and the bubble in the late 1990s because then, there were 5,000 companies trying to go public and it wasn't apparent what the business models were.

This time we've got a different scenario. We've seen some potential competitors fall by the wayside.

This is a platform that has gained tremendous human participation. Now, how well they capitalize that and turn that into cash generation. And profitability remains to be seen.

People Don't Trust Facebook
Christopher Soghoian , 29, a privacy advocate and graduate fellow at the Center for Applied Cybersecurity Research at Indiana University.

I think Facebook has a lot in common with cable companies, which is that no one likes using them.

People do not like Facebook. They don't trust Facebook. They're using them because they have to. Facebook gets people to give up information under the claim that it's private and then it's made public. And your only option is to shut down your account.

Looking at what's been happening with Google+ [Google's new social-networking initiative] and Facebook, there's a clear desire for an alternative. It's interesting to watch Google because even though they've had some privacy bumps, they're not a company that consumers hate. Facebook has opened themselves up to attack. The moment someone else comes along with a product that is equally compelling, I think they're going to be in trouble.

I think deep within the calculation within Facebook's valuation is the fact that it's very difficult for people to leave, but when someone comes along with a service that people can leave to, I think people are going to leave in large numbers.

At the end of the day, companies should build a relationship with their customers' trust.

They Are the Biggest, Most Powerful
Rick Marini, 38, chief executive of BranchOut Inc., a San Francisco-based start-up that has built a professional networking app on the Facebook platform.

Does [Facebook] deserve a higher than the average valuation? Absolutely yes.

From what I've read in the press, Facebook is doing $2 billion to $3 billion in annual revenue and if they're trading for $80 billion to $85 billion in the secondary market, that would imply a revenue multiple of 30 to 40. That would be considered high by Wall Street, but the reason why they can command that is because it's a private stock so it's hard for investors to be able to purchase shares. Therefore, with limited supply, the demand, i.e., the price, is going to be higher.

When you are the biggest, you are the most powerful and therefore, the market leader should command the most.

In Facebook's case, there's no real competitor that has even a decent foothold. They deserve a huge premium because it is like no other company existing today or like any other service in the history of the Internet.

My Boys Are Facebook Fanatics
Kenny Bott, 55, a retired financial adviser living in Las Vegas, Nev., who bought shares in publicly traded firm GSV Capital Corp. after it purchased shares of Facebook in the secondary market.

Living in Las Vegas was what really sparked my interest in Facebook. I saw the gaming industry just getting devastated and I was like, they've got to do something for their branding. I have seen Facebook play an integral part on getting the visitors back into Las Vegas.

I also looked at my boys and they are Facebook fanatics. One is 22 years old and the other is 26 years old.

When [GSV Capital founder and Chief Executive Michael Moe] and this whole thing started coming up about the secondary market, I'm like, 'Gosh, wouldn't it be just great if you could democratize Facebook so the average person could buy in.' As I started talking to my friends, they sat there and they said, 'If I can only own Facebook pre-IPO, it would be off the charts.'

I watch my boys and I watched the gaming industry. I was getting feedback from the rank and file.

I just said, this is gonna be off the charts. I just kept looking at these statistics. Socialnomics is here to stay. It's a whole revolution. I believe that we've only seen the tip of the iceberg.

Conservative Valuation Is $234 Billion
Lou Kerner, 49, managing director of the Private Shares Group at Wedbush Securities, where he was one of the first analysts to produce formal research reports on Facebook.

We think Facebook will be worth $234 billion in 2015. I think our estimates are quite conservative.

The right way to value Facebook is to go out to 2015 and discount it back at 16%, which would place it today at about $112 billion as a publicly traded company. Then, we give another 25% discount for the private market to get to an $85 billion market cap.

Fifty percent profit margin is about where [Facebook is] today. Assuming that's going to stay constant is very conservative.

In the private market, 100% of the supply side is aware that they can sell their [Facebook] shares. The number of people who participate is so low relative to the demand.

If you look back, people were saying [Facebook was overvalued] when it was trading at $15 billion and the reason people think it's crazy is because $15 billion is a really big number. It's just a big, big,big, big number; therefore it must be overvalued.

We did our first report in February 2010, and at that point we said that Facebook would be worth $100 billion in 2015. People laughed when I published that report and I was ridiculed in the blogosphere.

Because of how fast the company has accelerated its growth and monetization, we had them going from $100 billion to $235 billion in a year and a half.

Focus on Eyeballs, Ads
Sarah Hofstetter, 36, senior vice president at 360i, a New York-based ad agency that creates social-media advertising strategies for companies like Coca-Cola Co. and Comcast Corp.'s NBC Universal.

There are certain things that Facebook has right now that may be short-lived or may become the de facto. They have the eyeballs. They have something that's stronger than Google today, which is time commitment.

When you're searching [on Google], you're looking at the map. With Facebook, you're driving the car. People are using Facebook to discover content and hang out.

Facebook was very smart for years for focusing exclusively on the user experience before thinking about the advertising platform. Now that they are focused on the advertising, they need to be making sure that they're not losing sight of consumer behavior so that they're not just adapting their advertising platform. They're developing the standard for community conversations but that doesn't always equate to market dominance. They've got to keep their finger on the pulse and that's very hard to do at scale.