Is Facebook Worth $150 Billion?

On Monday, news surfaced that a small investment fund, GSV Capital, had purchased $6.6 million worth of shares of Facebook in the private market at a price that values the entire company at $70 billion. Here's my prediction: At the end of its first day of trading as a public company, Facebook's market capitalization will exceed $150 billion. If that sounds like fantasy, you should know that Facebook shares changed hands at that valuation in January on SharesPost, a private market for pre-IPO companies.

Google: the Facebook of 2004
Here's a benchmark for that figure: Google's (Nasdaq: GOOG  ) market value at the end of its first day of trading was a mere $27 billion. The search leader's IPO was the Facebook of its day, the most highly anticipated IPO of 2004. The following table contains direct comparables and milestone technology IPOs:

 

IPO Date

Trailing-12-Month Revenues at IPO

Price-to-Sales Multiple (end of first trading day)

Historical

 

 

 

Google Aug. 19, 2004 $2.3 billion 11.9
eBay (Nasdaq: EBAY  ) Sept. 24, 1998 $19.1 million 98.7
Amazon.com (Nasdaq: AMZN  ) May 16, 1997 $30.9 million 18.1
LinkedIn (NYSE: LNKD  ) May 19, 2011 $292.3 million 31.3
Pandora (NYSE: P  ) June 15, 2011 $167.2 million 17.4

Hypothetical

 

 

 

Facebook Q1 2012 $4 billion*

37.5

(assuming a $150 billion market value)

Source: Author's calculations, based on company filings. *Revenue estimate for 2011.

Don't make bad bets
At a $150 billion market value, Facebook's price-to-sales multiple would only be roughly 20% higher than LinkedIn's, which suggests it could easily occur. However, at three times Google's multiple, I think investors who buy in at that price would be setting themselves up for near certain disappointment. Would it be possible to earn an adequate return from that level (I'll define "adequate" as a 15% annualized return over the five years that follow the IPO)? It's possible but it's highly unlikely, an absolute best-case scenario in which Facebook manages its growth flawlessly and faces no competitive threat. That's not something I'd want to bet on to earn a 15% annualized return.

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Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of eBay, Google, and Amazon.com. 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 (16) | Recommend This Article (13)

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 June 29, 2011, at 4:30 PM, uaku wrote:

    Social media bubble, no one knows how long it will last

  • Report this Comment On June 29, 2011, at 5:08 PM, TMFMileHigh wrote:

    Hey Alex,

    I think you're right, but not because there's a general social media bubble.

    Rather, the bubble is a byproduct of an illiquid, poorly regulated, and otherwise nonsensical secondary market for hot issues:

    http://www.fool.com/investing/general/2011/03/28/dont-blame-...

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On June 29, 2011, at 6:25 PM, HikuU wrote:

    I hope not $150 billion because that indicates the bubble is rapidly expanding. I would have to look to short the Tech sector, hopefully with a leveraged ETF. fb is great, I use it all the time, there is great value there but not enough for $150 billion. Ad revenue fluctuates while games have a limited lifetime. I like social networking, but don't understand the business model enough to invest in it. I can smell a bubble though.

  • Report this Comment On June 29, 2011, at 7:06 PM, MichaelHamilton wrote:

    ridiculous

  • Report this Comment On June 29, 2011, at 8:42 PM, vrpirata wrote:

    I personally believe that Facebook is not Google of 2004.

    I believe that Facebook is the AOL few decades ago.

    Only time will unravel the truth.

    So many bubbles… Pandora is not even profitable, and will never be. I’m much more wealthier that Pandora because at least my net worth is positive… jajaja

  • Report this Comment On June 29, 2011, at 10:06 PM, dstb wrote:

    No.

  • Report this Comment On June 29, 2011, at 10:29 PM, mjmac89 wrote:

    Perhaps some analysis beyond "That's not something I'd want to bet on" would better help us make an informed decision regarding Facebook.

  • Report this Comment On June 29, 2011, at 11:17 PM, TMFAleph1 wrote:

    <<Perhaps some analysis beyond "That's not something I'd want to bet on" would better help us make an informed decision regarding Facebook.>>

    That's not the analysis, that's the conclusion.

  • Report this Comment On June 30, 2011, at 12:53 AM, MichaelDSimms wrote:

    Is Facebook Worth $150 Billion?

    I will make this quick, NO!

  • Report this Comment On June 30, 2011, at 8:27 AM, floridaboy32826 wrote:

    Myspace just sold for 35 mil. Was once worth 1 Billion. Social Media bubble. Don't believe the hype!

  • Report this Comment On June 30, 2011, at 8:31 AM, catoismymotor wrote:

    To me it is not worth $150 billion.

    My activity on FB does not involve playing Mafia Farm or playing hopscotch with the ads. When I sign on my pupose it to check the status of my friends, send a message or two and to look at the newly posted photos. If FB was like AOL in 1996 when they were siphoning money from me, and gillions of others, to use their service I could more easily see a high valuation. AOL was my internet gatekeeper. FB is just my list of pinpals.

  • Report this Comment On June 30, 2011, at 8:39 AM, catoismymotor wrote:

    I meant *penpals*. I don't go around sticking others and being stuck with needles.

  • Report this Comment On June 30, 2011, at 8:55 AM, TMFBlacknGold wrote:

    I think its absolutely ridiculous as well. However, how many vehicles exist that can get almost one billion people to volunteer all of the information that they do? Not any I can think of. How do you value people's personal information, networks, tastes? Targeted advertising makes or breaks Facebook.

  • Report this Comment On June 30, 2011, at 1:41 PM, Borbality wrote:

    Unproven business model. Knowing that I like the movie Total Recall doesn't mean I'm going to buy anything from anybody.

    Also, have to repeat the news that myspace just sold for $35 million. Even "Tom" hasn't been on there in months.

  • Report this Comment On June 30, 2011, at 2:36 PM, DBrown7 wrote:

    Someone made mentioned of possibly shorting the entire tech sector. With megacap stocks like Apple selling for 15x earnings, IBM for 13x earnings and Microsoft and Intel for under 10x earnings, you might want to think twice about shorting the entire sector, especially through an ETF weighted by market cap.

  • Report this Comment On June 30, 2011, at 2:43 PM, mikecart1 wrote:

    No! Facebook is worth at least $500 billion. I never have used a penny on the site and never have clicked on any ads, and spend less and less time on it since graduating undergrad, and use it no where near as much as I did when it was still called thefacebook, but man I must say this stock is way undervalued baby!!! $500 billion is fair value for this awesome company! The business model is pristine like Honus Wagner rookie card. The company is going places no one can ever imagine. In a few years, facebook will take over the world!!!!!

    (sarcasm)

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