Social Networking sites - Valuation

It is very hard to determine the value of social networking sites today. A year ago when Newscorp paid $580 million to purchase myspace, it raised some eyebrows. It had around 45 million users at that time and now has close to 90 million users (yes - it doubled in a year). After myspace signed a $900 million deal with Google recently (ad revenue over a period of three years), the $580 million does not look too high any more. To top this off, RBC capital analyst Jordan Rohan came out with a prediction in september that myspace will be worth $15 billion (yes, this is not a typo) in three years. But what are these valuations based on? That is the billion dollar question right now :)

Here is my attempt at valuing myspace. Current revenue: 200 million, let us assume it doubles each year over the next three years. Therefore, revenue three years from now will be 1.6 billion. Let us apply profit margins of 25% (same as google). That will result in profits of around 400 million three years from now. Now apply a P/E multiple of 55 (same as google) to these earnings. We come up with an astounding 22 BILLION!!

Ofcourse, the critical assumption here is that revenues will double each year over the next three years. But given, the growth so far and expected growth in the future, this may not be too farfetched.

The biggest problem is there are no good benchmarks in this industry and nobody is sure if the revenue model will continue to be ad-based. With so many questions unanswered, my valuation is as good as anybody else's I guess :-)