How Much Is Facebook Really Worth?

Given the buzz surrounding privately held social-networking site Facebook, the market's stirred up possible valuations as lofty as $15 billion. How much is the company really worth? I posed this question to three familiar Fool faces: Anders Bylund, Rick Aristotle Munarriz, and Tim Beyers.

Anders Bylund: Facebook isn't worth much
Before we think about what Facebook might be worth, let's examine the only other site that looks even a little bit like that operation: MySpace.

When Rupert Murdoch's News Corp. (NYSE: NWS  ) ponied up $580 million for that social-networking phenom, it seemed like a crazy deal. More than half a billion for some cockamamie collection of high school kids' personal Web pages? You can have it, Rupert. I don't want it. When the acquisition closed, MySpace owner Intermix had all of $89 million to show for trailing revenue.

The company reported earnings this week, and MySpace showed up as a mere rounding error. The operating profits were some undisclosed fraction of the $23 million reported as "other" operations.

There haven't been any goodwill writedowns on MySpace, but I have to think that it's just because the thing didn't cost all that much to begin with.

The Facebook guys do seem a bit more business-minded, and they've already generated $150 million in 2007 revenue. Facebook has recently collected some $300 million from outside investors, including Microsoft (Nasdaq: MSFT  ) . But founder and leader Mark Zuckerberg seems ready to burn through that stash quickly, with $200 million in data-center upgrades next year and a massive influx of new employees.

Since some of the finest marketing minds in the world have tried and largely failed to monetize social networking already, I see many years of losses and negative cash flows ahead for Facebook. Think Vonage (NYSE: VG  ) , where a promising business model has generated $828 million in trailing sales, but growing losses still accompany growing sales.

I love Vonage and Facebook as products, and I use both every day. But I wouldn't touch either stock with a 10-foot portfolio holder. Facebook will be worthless as a public stock, and worth a couple of hundred million for an acquirer in a few years. But some blue-eyed, deep-pocketed giant will probably overpay wildly for it soon after the IPO, or before we get that far. Whatever they pay won't be the real value.

Rick Aristotle Munarriz: Take my $3 billion and run
$3 billion is my optimistic stab at Facebook's worth, though the sum could easily fall by half if traffic growth stalls at the popular social-networking site.

Like a good student, I'll show my math. High-margin online speedsters like Google (Nasdaq: GOOG  ) and Bankrate (Nasdaq: RATE  ) trade at roughly 10 times trailing revenue. Slower Internet content players like Yahoo! (Nasdaq: YHOO  ) and The Knot (Nasdaq: KNOT  ) fetch about half that top-line multiple.

Facebook deserves a multiple at the top of that range. Most reports peg Facebook's annual revenue in 2007 around $150 million, implying a modest value of less than $2 billion. I tack on a little extra because traffic continues to grow at Facebook, and the company's innovative move of opening up its platform to developers -- long before MySpace or Google followed suit with their social-networking sites -- is worthy of a premium. The brand is gold, too.

However, this is also social-networking we're talking about. Google's latest report pinned part of the blame for its margin crunch on the challenging monetization of social networks. It's paying $300 million a year to populate MySpace with ads, and that move clearly isn't panning out. Traffic acquisition costs are growing faster than third-party revenue. Facebook is smaller, but it provides a more targeted audience, with healthier demographics than MySpace.

Given the uncertainty of social-networking sites' future popularity -- not to mention the identity of any future leaders in the space -- one must show some restraint in pricing the warranted premium. Facebook has tested the loyalty of its user base in the past with intrusive features like social ads and profile-snooping, and it's hard to pay too much for a company that may be another misstep or two away from alienating its user base.

Take my $3 billion and run.

Tim Beyers: $15 billion is a walk in the park
The mistake in valuing Facebook is to assume that it will never be more than a social network. That ads are all there is and ever will be. Balderdash!

Facebook has become what Yahoo! has always wanted to be: a portal. Trouble is, even though it boasts the world's most popular collection of websites, Yahoo! never could pull users together in one place.

Sure, there's MyYahoo!, but its utilitarian emphasis on RSS feeds, email, and calendar miss what makes the Web really rock: connectivity. Facebook, by contrast, is a portal on steroids; it starts with connectivity and builds outward. Literally.

Facebook has more than 15,000 applications live on its site and, by my count, less than 30 were made in-house. Most of these applications make little or no money. But some, such as Scrabulous, are pulling in $25,000 per month in revenue. And virtually all of that is from ads.

Think of what might occur if the makers of Scrabulous decided to create new features that were available at a premium -- say, $1 a month per feature? Would users pay it? I think so.

My point here is simple. Facebook's profit-enabling business model could easily morph into that of a digital landlord. Want to launch a Facebook business? Terrific. All we ask is a modest fee.

How much is a matter of debate. So let's ask a different question: What's a Facebook user worth? If, as Rick asserts, valuing Facebook at $15 billion requires at least $1.5 billion in trailing revenue, then ads and the site's 64 million users would have to bring in $23.50 each per year.

Think that's crazy? Unreachable? It might be, if Yahoo! didn't get $27.88 per registered user annually. Or if eBay didn't bag $27.80 each from its 276 million registered users.

Here's my point: If Facebook is as for real as we all seem to believe -- and as (ahem) Microsoft seems to believe -- then $23.50 a year (and $15 billion in market value) is at very least possible, and perhaps even probable.


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