Is Facebook Worth $100 Billion?

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.

Company

% of Company Sold on IPO

Share Price Since IPO

Zillow.com (Nasdaq: Z  ) 19.9% (50%)
Pandora 9.2% (62%)
LinkedIn 8.3% (52%)
Groupon 4.7% (49%)

Source: The Motley Fool, "Is This IPO Tactic Creating the Next Bubble?"

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.

In the meantime, I urge you to check out a free report we released yesterday titled "The Motley Fool's Top Stock for 2012." It details a company with massive profit potential that the market has largely ignored. Until now, that is. Given this company's recent performance, it simply won't stay off investors' radars much longer. To get your copy of this free report before this company's share price explodes, click here now.

Foolish contributor John Maxfield does not have a position in any of the companies mentioned in this article. The Motley Fool owns shares of Apple, PepsiCo, and Google. Motley Fool newsletter services have recommended buying shares of McDonald's, PepsiCo, Google, Apple, Zillow, Amazon.com, and Visa. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 02, 2011, at 4:29 PM, accelerando wrote:

    Facebook is not google. In all likelihood facebook sits in the long line of favored social sites that never delivered on their promises.

    First there was AOL -- remember AOL -- remember how much it was once worth? It's most cherished service were it's romantic chatrooms.

    Then there was yahoo -- the new favored social chatroom site that replaced aol.

    Then there was myspace -- truly innovative company, did really well, sold out to a whale, got blitzed by facebook.

    Now there is facebook. The latest company that wants to spend a gazillion dollars to collect eyeballs and make it back in advertising.

    Just like the others, the more advertising, the worse the user experience and eventually, the rapid erosion of the user base.

    Also. Sometime in the near future someone -- probably apple, will set up a peer-to-peer social network where users private information is not stored on some common server --

    Also. It's very size precludes innovation. The interface cannot radically change because everyone is so used to it. All sorts of better stuff can be built to enhance the experience but facebook will not be the one building it.

    Value of facebook five years from now? 2-5 billion dollars. Or maybe zero.

  • Report this Comment On December 02, 2011, at 5:54 PM, Hawmps wrote:

    Facebook has made a big spash, but $100mil? Maybe one day but not @ IPO. I wait for it to open and buy after it deflates and posts a few quarters of useable data. I anticipate the market to be greedy... so be fearful.

  • Report this Comment On December 02, 2011, at 5:58 PM, TMFBiggles wrote:

    @ accelerando -

    Apple already tried social. Do a Google search for "Apple social network". Out of all the major tech companies, Apple would never be the one I'd peg to do peer-to-peer anything.

    -Alex

  • Report this Comment On December 02, 2011, at 6:12 PM, TheDumbMoney wrote:

    "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."

    This is an untrue statement. Investors have been invested in this from day one. MSFT invested money and owns 2%. Many private equity companies have invested, and shares are available on second market.

    I agree Facebook may indeed be worth more than $100 billion. Of course, the IPO will be priced there, and it's very possible the market will value it at $150 billion before you or I can even buy shares.

    The only thing for certain is that the truly spectacular money has already been made by early investors, since Facebook deliberately chose not to go public for a number of years while it grew. On the one hand, this is irritating, since it means the best its NEW investors can probably hope for is a double after a few years. On the other hand, this is the Google model -- which forwent going public during the tech bubble, because it didn't need to. Only companies that have killer access to the private equity markets can afford to do things this way, and forego public markets for so long. What kind of companies are those? Good companies.

  • Report this Comment On December 02, 2011, at 7:25 PM, marc5477 wrote:

    Fundamentally, too easy to duplicate and doesnt provide anything unique. A high school student with very little programming skill can duplicate most of the services offered by FB. With a little programming they can make a FB alternative in about 2 months worth of work. This means that its only value is its user base but that will not last when the new "hot" thing comes around. I personally will switch to Google+ soon because I simply dont trust FB or its dirty CEO. I dont think Google+ will be the next FB but at least I dont feel dirty when using their site. On top of that, it give me less annoying ads, better security, and the same functions as FB plus some more.

  • Report this Comment On December 02, 2011, at 7:34 PM, TheDumbMoney wrote:

    I can't really switch from Facebook even if I want to. That's the definition of a moat.

  • Report this Comment On December 02, 2011, at 9:45 PM, WeWereWallStreet wrote:

    We are in the middle of dotcom III and we can't help but wonder what the pump-and-dump kings of Sand Hill Road think of the fools who are making it happen. We discuss this in our opening blast: www.WeWereWallStreet.com/About-Us.html

    We think people on Facebook fritter away time better spent in person with friends and family, and we wouldn't trust Zuckerberg with your list of friends, pictures and, soon, money, let alone ours.

  • Report this Comment On December 02, 2011, at 10:14 PM, JohnMaxfield37 wrote:

    One of our editors shot me this via email earlier.

    Thought those of you who remember the beginning of facebook would appreciate it.

    It's an article we wrote in 2006 titled: "Is Facebook Worth $2 Billion?"

    Those were the good old days when people thought Rupert Murdoch got a deal when he bought MySpace.com for $580 million.

    The link is: http://www.fool.com/investing/general/2006/04/27/is-facebook...

  • Report this Comment On December 03, 2011, at 6:17 AM, somethingnew wrote:

    "And investors will finally have the opportunity to participate financially in a social network..." I think an appropriate alternate ending line to this sentence would be "...after everyone else on Wallstreet has" because basically what we get in terms of future shareholder value are the leftovers that all the VC's, current employees and investment banks will not have already taken. At a valuation of $100 billion it may very well climb in value but nothing like a tiny company would or Facebook if they went public three years ago.

  • Report this Comment On December 03, 2011, at 6:20 AM, somethingnew wrote:

    My mistake, I just read Dumberthanafool's comment and realized what I just stated was pretty much redundant. I'm glad other people realize this as well.

  • Report this Comment On December 03, 2011, at 7:33 AM, 2social2 wrote:

    No it's not worth a 100 billion. It's crazy. I'm sure FB will be confronted with privacy issues putting their valu much under pressure.

    I'd prefer investing in companies that allows people and businesses to go social and be owner of their content. For instance: SocialGO

    SocialGO is very easy to use (drag and drop), a social website is created within minutes. Keeping full control over the content and thus stay in control over your privacy. SocialGO #2 social website creator is quoted at LSE and has a marketcap of less then 5 million GBP! Shareprice .01GBP.

  • Report this Comment On December 03, 2011, at 7:03 PM, Cashmenow wrote:

    Facebook may well be worth an approximate value it hopes to get in its IPO let's not forget wre only scratching the surface of the Iternet. But it is true that only a select few investors will get a chance to buy the stock. So dream as much as you want the sudden increase of valuation is meaningless to the average retail investor. Unless you can get in apron the ground floor of the IPO for Facebook you don't have much chance to realize a gains from the stock selling. Am I correct or not.

  • Report this Comment On December 03, 2011, at 9:12 PM, TMFRosetint wrote:

    No, no it's not. Facebook will never get the CPC Google's ads get because they're not targeted.

    That's one of the biggest bull cases I've seen that justifies Facebook's valuation - that somehow its social website is as attractive for advertisers as targeted advertising is. It's not, and unless the website changes dramatically, it never will be.

    Google is massive, but its ads are worth a lot more because they're very targeted. If your toilet breaks and you need a plumber, you can type that in Google and an ad will come up for a local plumber.

    Facebook has no such advantage, and has no real use except for very general advertising. People tune them out, anyway, since they're not looking to get products sold to them. They're there to "associate" with their friends.

    I can't wait to red thumb Facebook the moment I can rate it on CAPS.

  • Report this Comment On December 04, 2011, at 3:47 AM, CaptainWidget wrote:

    Facebook has no competitive moat. No way of increasing earnings that doesn't diminish their user base. And most importantly...they provide absolutely nothing of value.

    Their most important feature, YOUR friends, could easily leave and go to whatever new site is hot at the moment. Google + got a 40 million user base within about 3 weeks because people were sick of Facebook. It's the fastest growing social media site ever, and there's no reason to think they (or anyone else providing a smoother service) won't destroy Facebook's customer base.

    Facebook had the distinction of destroying about 30 minutes of my time every day until I wisely deleted my account. Surprise Surprise..no withdraws....no real life phone calls asking what happened.....no drop in my product sales.....just...more free time. This company should be valued at negative 100 billion for all the hours of productivity they steal from real companies.

  • Report this Comment On December 04, 2011, at 10:53 PM, TradeDragonfly wrote:

    I love the conversation here. On one hand we have people who think facebook is the best company ever, and on the other, people who think it will eventually topple. Personally, I agree that their earnings growth will have to come at a loss of customer base, and as it is their site is already ridiculously clouded with ads. Sometimes I get ads on my own profile. Since when did it become ok to make it look like I support Land O Lakes butter by putting it on my page? Facebook has peaked, and that's why they're going public. Whose going to be selling shares on opening day? All the smart people who got in early. Why would they be getting out? The money's already been made, that's why.

  • Report this Comment On December 05, 2011, at 1:10 AM, CaptainWidget wrote:

    Let's not forget......they've already got 1/7th of the planet using their network........

    What's the absolute best case scenario (aside from colonizing other galaxies)? Multiply their earnings by 7? Sign me up!

  • Report this Comment On December 05, 2011, at 1:54 PM, TMFTomGardner wrote:

    You know you have promise as an organization when there are so many strong opinions. Readers should remember the negative bias on Amazon and Google early on in their public market lives. I don't mean to say that Facebook is a guaranteed win. But do remember this, Zuckerberg has kept the company private many years more than it needed to be. I say - be careful of knee jerk naysaying of the growth company with a committed leader on a mission. Facebook has plenty of challenges but also -- with 750 million users -- the company has infinite futures as well. I would not at all be surprised to see them create subscription services...which could be a boon for recurring cashflow. Again, it's easy to naysay the present...but leadership has been signaling that they are building for the very longterm. It pays, in that case, to spend some of your time thinking through what the longterm might entail. - Tom Gardner

  • Report this Comment On December 20, 2011, at 1:07 AM, sawoh wrote:

    If you use Facebook and you find something interesting, your first impulse is to share it.

    Facebook currently has a major entrenchment in the personal lives of many Internet users. It is where they are "real" - where they form an identity - and Facebook creates a reference-frame to the rest of the Internet. It is different from its predecessors like MySpace or Friendster, and even its contemporaries like Google+ and Twitter, because of the high centralization of "real" identity. People I go to school with and a girl I have a secret crush on use the network.

    It has both breadth and depth without predecessor - but not without successor.

    People will learn and share through computers with or without Google, Facebook, Youtube, Yahoo, or Wikipedia. These companies are just manifestations of the underlying human impulses for search, social, media, portal, and definition (respectively, to the 5 companies just mentioned).

    It is so easy today to create a completely personally-controlled website. But in the future, it will be even easier, and even more personal! People will be able to search without search engines, create identities without profiles, upload media without media hubs, navigate without portals, and define without dictionaries.

    The network has no center.

  • Report this Comment On January 30, 2012, at 5:38 PM, nomadhelper wrote:

    facebook may or may not get its IPO target now as most people have not really realised the true potential of technologies just yet. tech firms have been innovating though most common people have not really used those features fully. Out of the 10 fastest growing technologies in next couple of years, 2 of them are cloud computing and social media ( http://www.networkworld.com/news/2011/071511-cisco-futurist.... - these technologies might change the world in the next 10 years - some of them already have. Microsoft though its products are mostly not great, they still know how to make money and they are not only investors and partners of Facebook, they also have cloud computing inside Facebook - MS Doc on Facebook is an answer to Google Docs (not needed to have so many copies of 1 file + can edit the same file by so many people so many times+ no need to store file on any system as it's there in the cloud and lastly, can type within the cloud itself and not needed to type on device and upload that file though both options are there for both Google Docs and MS Doc app under Facebook). Cloud computing is like email systems (its 1 of the emerging technologies along with social media). Facebook, Twitter, etc are more than just social networks (Twitter and Facebook are both into digital publishing)-Facebook has pages, groups and apps not just for games and videos including music ones but also for news-business,general,updates of firms, finance and investments including real-time stocks, journal articles, etc.

    Which are the new devices for using apps, social media, etc? smartphones and tablets!!! What do people mostly use on them? services including apps which 1 finds separately or on social networks like Facebook - apps is a new market though bit saturated as there are about 1 billion apps on Android and Apple phones itself. The mobile sector is already worth more than 1 trillion dollars and services like apps whether news, gaming, music, videos, software (via cloud computing), etc nearly 1 trillion dollars worth.

    Apps, credits (visual money), etc will be how tech and other firms make money-credits already there on Facebook-to see Discovery Channel within Facebook, need those. Also Skype bought over by Microsoft is already there within Facebook. Facebook isn't just a social network and neither is Twitter and think others also-just like Apple changed the music industry, Facebook and other social media including Twitter, Linkedin, etc will change industries (including Google) - already have started with publishing and media sectors and few others including them being used by health, education, finance sectors, etc. Social media is the in-thing and another emerging technology. Out of the top 10 emerging technologies, 2 of them are social media and cloud computing, both of which Facebook has. Reason why Google wants Google Plus to do well. Also if people think, Facebook forces others, what about Apple? Apple did the same and so did P&G - they are innovators and leading firms these days are innovators. Customer-centric approach alone won't help as again and again, it's 1980s and 1990s approach. Now, it's innovation approach with bit of customer-centric approach - in fact, it's days of using blue strategy or low-cost innovation-reason why firms from emerging countries are able to challenge firms from developed world and it's no more globalization-it's globality or glocalization or semi-globalization (3 terms.....it's individuals competing with local and multinational businesses anywhere in this world). Apple, Google, Samsung, Facebook are few of the innovators from developed world though Samsung is from an emerging country (emerging yet developed country-South Korea....another emerging 1 is Mexico....there are couple more though fastest emerging 1s are from Brazil, China, India and Russia-the former 3 with loads of low-cost innovation). no data is hidden-all available on any database even if it's charity or not whether it has a database or not-sooner or later, it will be on the database which will then be connected on the internet via the web plus no firm nor organisation removes the data asap-some will still have records even after requests-facebook does have the option of permanently deleting records which occurs after 2 weeks though may take further time like any other firm

  • Report this Comment On January 30, 2012, at 5:52 PM, nomadhelper wrote:

    Sixth Sense technology is another 1 - right now in its prototype stage - done by Pranav Mistry, 1 of the world's leading scientists at MIT. If Sixth Sense technology becomes commercialised, won't need any devices-smartphones,tablets,etc - more can be seen under http://www.ted.com/talks/pranav_mistry_the_thrilling_potenti... -that time no need for devices like ipad,iphone,etc to view data including boarding time or boarding pass etc-can be viewed on hand….same dude has already done mouseless + a pen that can draw in 3D; and a public map that can act as Google of physical world-all these are linked to the gestural technologies (1 place it’s used -xbox, wii, playstation)

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