Is Facebook an 18-Bagger?

Facebook's user population has more than doubled since January, from 150 million to 350 million. But investors who still hold shares of this pre-IPO social superstar may be sitting on an 18-bagger.

More on the math in a minute. First, the news: TechCrunch's Michael Arrington reports that Facebook recently repurchased shares at $25 apiece for an implied valuation of $11 billion. Yet the price may be inflated, more a consequence of contractual demands than market demand.

"This transaction was initiated by a third party and was going to be run through Second Market," Arrington writes. "When common holders indicated they wanted to sell, Facebook had to let the sale happen or exercise a right of first refusal. They exercised that right."

Maybe this isn't so bad. Microsoft (Nasdaq: MSFT  ) purchased an earlier stake in Facebook at a $15 billion implied value. Twitter is already worth $1 billion, and Web-based companies are gaining steam in the IPO market. Recent examples include OpenTable (Nasdaq: OPEN  ) , LogMeIn (Nasdaq: LOGM  ) , and Changyou.com (Nasdaq: CYOU  ) .

What worries me is Facebook's run-up in price. In January, investor Paul Kedrosky mused that Facebook's value had topped out at $600 million. Say he was off by 100%. Say Facebook was worth $1.2 billion at the dawn of 2009. Longtime investors would still have seen a nine-fold gain in their holdings this year. And if he was right, those same investors are now sitting on -- yep, that's right -- an 18-bagger.

All of this is problematic if Facebook wishes to go public in 2010. CEO Mark Zuckerberg can't price his company at $11 billion if that's what private equity investors are paying now. They're looking for a mark-up. A big mark-up, if possible.

You know what 2009's biggest IPO to date was worth? Brazil's Banco Santander (NYSE: BSBR  ) came public in October at just over $4 billion. Rocket stock A123 Systems (Nasdaq: AONE  ) , one of September's newbies, is still worth only $2 billion, and that's after a 56% run-up.

In the end, it really doesn't matter what anyone says Facebook is worth. All that matters is the pricing the IPO market will tolerate. Right now, $11 billion looks too rich.

Have a different view? Let's hear it. You can weigh in using the comments box below.

OpenTable is a Motley Fool Rule Breakers recommendation. Microsoft is a Motley Fool Inside Value pick. Motley Fool Options  has recommended a diagonal call strategy on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is always public about disclosure.


Read/Post Comments (7) | Recommend This Article (4)

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 29, 2009, at 12:25 PM, pondee619 wrote:

    What did Facebook earn in 2008? What will they earn in 2009? What revenue stream supported both years earnings? What are the earnings estimates for each of the next five years? On what are those estimates based? How will (is) Facebook mak(ing) money?

    "In the end, it really doesn't matter what anyone says Facebook is worth. All that matters is the pricing the IPO market will tolerate" Isn't this the "greater fool" theory?

  • Report this Comment On December 29, 2009, at 12:34 PM, jlanganki wrote:

    Facebook is about to go out of business if they don't find a way to make money. Therefore the company is worth zero.

  • Report this Comment On December 29, 2009, at 2:58 PM, TMFMileHigh wrote:

    Hello pondee619 and jlanganki,

    Facebook was on track to produce more than $500 million in revenue this year, up from at least $300 million in 2008. Advertising is its primary source of revenue.

    Also, Disney wants Facebook to have a voice on its board:

    http://www.reuters.com/article/idUSN2315778020091223?type=ma...

    Foolish best wishes for 2010 and beyond,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On December 29, 2009, at 3:28 PM, pondee619 wrote:

    Tim (TMFMileHigh and @milehighfool on Twitter):

    I'll assume, then, that their were no earnings, yet.

    What would be a reasonable multiple of revenue with which value a company whose primary source of revenue is advertising? "Advertising is its primary source of revenue"

    Have there been any projections of when profitability will arrive and/or what 2010's revenue will be like?

  • Report this Comment On December 29, 2009, at 4:24 PM, TMFMileHigh wrote:

    Hello pondee619,

    Since Facebook is still private, we don't have any hard information about profits.

    No matter, we can compare Facebook to another advertising company: the 2004 edition of Google.

    Capital IQ says that Big Goo traded for between 12 and 20 times total revenue in its IPO year. Using the same multiples here, and assuming that FB will, indeed, book $500 million in 2009 revenue, implies a market value between $6 and $10 billion -- not far off from what TechCrunch has been reporting, and probably lower than what VC and PE investors are hoping for.

    Does this help?

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On December 30, 2009, at 8:03 AM, pondee619 wrote:

    thanks

  • Report this Comment On December 31, 2009, at 12:19 PM, bullish2050 wrote:

    This reminds me of when everyone told me I was crazy paying $110 per share for Google. Facebook will have a similar trading response post IPO.

    Just my thoughts

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