Is Facebook Worth $100 Billion?

[garbon]

http://www.fool.com/investing/general/2011/12/02/is-facebook-worth-100-billion.aspx

So can someone explain why facebook could be worth so much? Sure they point out the many user hours of captive audience but when end is there if that isn't leveraged? After all facebook ads - at least as they currently exist - are pretty low end.

It seems clear that Facebook will file its initial public offering sometime early next year. In doing so, it's rumored the social media giant will seek $10 billion for 10% of the company, implying an overall valuation of $100 billion.

As an investor, I can't help but believe that Facebook's IPO will be a notable event. And investors will finally have the opportunity to participate financially in a social network that may, by the time of the offering, eclipse a billion people.

It nevertheless remains to be seen whether a promising yet relatively unprofitable company like Facebook warrants a higher market capitalization than tried-and-true corporate giants such as PepsiCo, McDonald's, and Amazon.com (Nasdaq: AMZN  ) .

Putting things in perspective
It's easy to believe that Facebook's social ubiquity translates into monster sales figures. In 2010, for example, its closest online competitor, Google (Nasdaq: GOOG  ) , recorded revenues of nearly $30 billion -- Amazon came in at $34 billion.

Can you guess what Facebook's 2010 revenues were? Try a measly $2 billion. Yep, according to sales alone, Facebook is less than half the size of Foot Locker. Heck, even Cracker Barrel Old Country Store had $400 million more in sales than Facebook did last year -- yes, I did just go there.

Thus, at $100 billion, Facebook would be trading for an astounding 50 times sales -- 23 times sales if the company meets this year's expectations. To give you some context, the latter figure is almost twice LinkedIn's (NYSE: LNKD  ) multiple, three times Groupon's (Nasdaq: GRPN  ) and Pandora's (NYSE: P  ) multiples, four times Google's, and seven times Apple's (Nasdaq: AAPL  ) . Not to mention, all of these companies, with the exception of Apple and maybe Google, are trading at multiples most investors view as pricy in their own right!

So where's the catch?
Quite simply, I don't think there is one.

On the surface, it's tempting to attribute Facebook's seemingly absurd $100 billion valuation to the company's purported "low float" IPO strategy. Under this approach, explained in a recent video by two Fools, a company restricts the amount of stock available at its IPO. This drives up the price of each share in the short term by reducing supply. The table below illustrates four tech companies that did this earlier in the year. As you can see, while the low float strategy increases value in the short term, it alone cannot sustain value over a longer time horizon, as evidenced by what's happened to these companies' share prices in the meantime.

Unlike these companies, however, I don't believe Facebook needs gimmicks to legitimize its valuation target. In other words, call me crazy, but I think Facebook may very well be worth $100 billion.

Follow my logic for just one second. According to The Wall Street Journal, Facebook will have $4.3 billion of worldwide revenue this year, more than double its 2010 revenues of $2 billion as I mentioned earlier. If it grows revenues by a comparatively measly 60% next year to $7 billion -- and realizes a 50% operating profit similar to Google's -- then it should take home somewhere in the range of $2.3 billion after tax. At $100 billion, that would equate to a price to earnings multiple of 44, well below that of a known-legitimate investment like Amazon, which comes in at 101.

This simple calculation, moreover, ignores the sheer magnitude of Facebook's online ubiquity. According to comScore, Facebook had 790 million unique visitors in October, each of whom spent an average of six hours on the social network. That equates to a cumulative 4.74 billion hours of captive audience in one month. By comparison, Google had 1.1 billion unique visitors, each of whom spent less than four hours on average on the site. LinkedIn, on the other hand, had 92 million unique visitors in October, each of whom spent an average of only 15 minutes on the site, equating to a total of only 23 million hours. Put in these terms, it makes sense that Facebook's valuation would be approaching Google's $186 billion market capitalization and well in excess of LinkedIn's $6.5 billion.

Should you buy in or not?
Getting overly excited about an IPO has left many an investor in dismay once the market's cooler minds prevail. For this reason, you'll want to see Facebook's financial statements, available perhaps as soon as this month, before deciding to jump on the proverbial bandwagon.

[Ideologue]

The fuck does the guy have against Cracker Barrel?

[Capetan Mihali]

I'd like to know how they calculate the amount of time each user spends on the site; leaving a Facebook tab open all day while barely looking at it is not uncommon....

[Ed Anger]

The fuck does the guy have against Cracker Barrel?

John Maxfield only eats lobster.

[HVC]

I'd like to know how they calculate the amount of time each user spends on the site; leaving a Facebook tab open all day while barely looking at it is not uncommon....

you can track active use vs passive. ie refreshing, changing pages, etc. Still, no worth anywhere near 100 billion. did no one learn fromt he last net bust?

[Eddie Teach]

Not to me it isn't. 

[Valmy]

you can track active use vs passive. ie refreshing, changing pages, etc. Still, no worth anywhere near 100 billion. did no one learn fromt he last net bust?

I was thinking the same thing...a company valued at way over its revenues because of its mighty internetness?  Haven't we heard this before?  Besides how do we know something newer and better will not come along and Myspace Facebook?

[The Brain]

I'd pay $100 billion to end Facebook, sure.

[Slargos]

you can track active use vs passive. ie refreshing, changing pages, etc. Still, no worth anywhere near 100 billion. did no one learn fromt he last net bust?

I was thinking the same thing...a company valued at way over its revenues because of its mighty internetness?  Haven't we heard this before?  Besides how do we know something newer and better will not come along and Myspace Facebook?

Did Myspace ever have the massively bloated user numbers and penetration in the zeitgeist that facebook does?
Google and Facebook have become concepts in themselves to similar extent as for instance for 50% of the net population Internet Explorer is The Internet.

[Admiral Yi]

I'm curious, has anyone here actually clicked an internet ad to buy something, or been otherwise prompted by an internet ad to make a purchase?

[The Brain]

I'm curious, has anyone here actually clicked an internet ad to buy something, or been otherwise prompted by an internet ad to make a purchase?

I've won about a million IPhones. But buying? No.

[Fate]

I'm curious, has anyone here actually clicked an internet ad to buy something, or been otherwise prompted by an internet ad to make a purchase?

Yeah, but not for something I wasn't already looking to buy. Last month I was searching for a topcoats and gave up looking for a bit. I found one I liked via an internet ad that suddenly appeared after I suppose google told them I was looking for one.

[Admiral Yi]

Topcoat?  Are you an immigrant Fate?

[Jacob]

Unless there's some unknown rot at the core of Facebook, it's worth a whole lot of money yes. Is that amount $100 Billion? I don't know, I have no idea how to properly evaluate a company IPO so I'll have to pass on that. But at this point Facebook is, from my position of unprivileged information, a peer of Amazon and Google. If those companies' values are in the same ballpark as $100 Billion, then yeah, same goes for Facebook.

Facebook is the primary interface for "the internet" for many many people. It has huge reach. The company is in a good position to make a lot more money than it's doing now.

[Jacob]

I was thinking the same thing...a company valued at way over its revenues because of its mighty internetness?  Haven't we heard this before?  Besides how do we know something newer and better will not come along and Myspace Facebook?

You mean like google+?

I think Facebook is going to be hard to dislodge from the position it has in peoples' lives right now. Most users have huge amounts of their lives invested into Facebook at this point. Years worth of photos and contacts all easily accessible and shareable. It won't be easy to convince people to walk away from that.