Facebook recently reached a $33 billion valuation on the private market. This is comparable to companies such as Time Warner, Starbucks, Visa and Southwest Airlines. It seems fair to ask whether this is a reasonable valuation for a social networking website.
On the private stock market Sharespost, one eager buyer wants to purchase Facebook stock at $75 a share. This implicitly values Facebook at an impressive $33.2 billion. According to the analysts at at Private Equity Data Center, this is fairly close to Facebook's fundamental value of $35 billion.
This valuation implies a handsome return for Facebook's investors, which together made an aggregate investment of $778 million (including Microsoft's $240 million). Sure, Facebook is the global leader in social networking. Moreover, last year Facebook claimed that it turned cash flow positive. But is this valuation reasonable? Let's look at some crude valuation metrics.
Value per user
Facebook states that it has 400 million "active users". This implies that on average each user is worth $83. So one way or the other, on average every Facebook user needs to generate $83 in advertising revenues. Is this realistic? How many ads did you click on Facebook so far? Do you think you will make Facebook earn $83?
Earnings multiple
Inside Facebook forecasts that Facebook will generate $1 billion in sales this year. This gives some insight in Facebook's earning potential. Let's assume that Facebook has a hefty 80% net profit margin. Then Facebook would be valued at 42 times net income. The only way to justify such a multiple is if Facebook's earning will show steep growth indefinitely.
Admittedly, the above metrics are very rough. As a private company, Facebook decided to be reserved in sharing figures about its performance. This prevents a thorough analysis of Facebook's valuation. Still, my personal gut feeling is that Facebook's current valuation is on the steep side. Obviously, I might be wrong here. Possibly there is still an enormous upside in the valuation: some sources speculate that the true value is closer to $100 billion.
Note that I assumed that Facebook is cash and debt free in the above.
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