Reverse Engineering Facebook’s Valuation Back in January, Goldman Sachs’s investment in Facebook at an implied valuation of $50 billion caused

quite a stir. While some felt the valuation was reasonable[1], many investors balked at such a massive evaluation, which exceeds the market cap of long-established tech giants such as Yahoo and eBay. A poll of Bloomberg users back in February revealed that 96% believed that Facebook was overvalued at this price.[2] The recent news that General Atlantic is buying an 0.1 percent share of Facebook at $65 billion will surely reignite this debate.[3] Since Facebook is a private company (for now, at least)[4], financial information on Facebook is hard to come by, but this hasn’t stopped many in the blogosphere from trying to make sense of the recent Facebook valuations. Most of the analysis of the Facebook valuation has been fairly qualitative, with observers making broad claims about the company’s extensive user base and its potential to exploit the hours those users spend on the site daily.[5] The quantitative attempts to value Facebook that have been undertaken, such as the impressive effort by Trefis which pegs Facebook at $45 billion[6], are based on a fair amount of estimates, projections, and guesswork. There simply isn’t enough good, hard data out there about Facebook to do a rigorous valuation. With this in mind, an interesting way to make sense of Facebook’s valuation is to utilize the one hard number we do have $65 billion – and to reverse engineer it. What are the multiples implied by such an enormous valuation? Are these implied values reasonable? Since they’re easier to compute, let’s start with the multiples. From the valuation, we know Facebook’s implied market cap, and if we use the numbers from Trefis, we can roughly estimate Facebook’s enterprise value at around $63 billion. Around the time of the Goldman deal, documents leaked that revealed Facebook raked in $1.2 billion in revenue and $355 million in earnings during the first 9 months of 2010. [7] In addition,If we project this out straight for full year revenues and earnings of $1.6 billion and $475 million, this gives Facebook an EV/Revenue of 52.5x and a P/E ratio of about 137. How do these numbers stack up to some of Facebook’s competitors? While P/E ratios above 100 for heavily traded companies are certainly not without precedent; OpenTable is currently trading at a P/E ratio of nearly 147, for example. However, such huge ratios are generally met with great skepticism with investors, and OpenTable is no exception.[8] As for EV/Revenue, NeXtup Research’s October 2010 report found that

Yahoo. html [8] http://www. those Goldman bankers couldn’t be wrong.com/2011/01/03/facebook-ipo-may-2012/ [5] http://www.net/investment-talking/troublewhen-trading-high-growth-stocks-open/ .sytaylor. it’s Facebook’s combination of a Google-like web presence and startup-like growth potential that makes it so valuable.ibtimes. Thus. and doesn’t have much hope in expanding elsewhere.wordpress.trefis# [7] http://nymag.com/daily/intel/2011/01/goldmans_leaked_details_on_fac. we arrive at another fundamental problem in valuing Facebook: the unparalleled growth. user base. Besides.com/id/41892971 [4] http://mashable. and which ultimately may justify such a hefty valuation. comparing them to a company like Facebook doesn’t make a lot of sense.trefis.htm [3] http://www.com/articles/107909/20110202/facebookovervalued-at-50-bln-bloomberg-s-global-poll. Looking at these numbers alone seems to imply that Facebook is drastically overvalued. and brand name that make the company so unique render comparables analysis practically useless. right…? References: [1] http://doctordisruptive.com/company?hm=FBOOK. Facebook’s EV/Revenue multiple is more than double its closest competitor. whereas Facebook has a truly global reach.net/2011/01/16/is-facebook-overvalued-will-itfail/ [6] https://www. comparing them to similar social networking sites like Mixi doesn’t really work either.intelligentspeculator.com/2011/01/03/facebooks-50billion-valuation-that-sounds-reasonable-even-cheap/ [2] http://www. thinking a bit deeper about these numbers.a group of similar companies such as Google. On the other hand. Xing and Mixi (Japan’s leading social networking site) had a median EV/Revenue multiple of 3. with 70% of its users residing outside the US. However.8x. Mixi already controls 80% of the Japanese market. Indeed. and an order of magnitude greater than most. with a group high of 22.cnbc.4x. Since companies like Yahoo and Google are much further along in their corporate growth cycles.

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