Facebook friend gives it a rich $23 billion valuation
Facebook has latched on to some good friends. Venture capital firm Elevation Partners just gave the social networking company a valuation of some $23 billion with the purchase of another 2.4 million shares on the secondary market. That’s more than triple what Facebook appeared to be worth a year ago. And at nearly 30 times trailing sales, it’s about twice the multiple Google
Valuing Facebook, even on the back of an envelope, isn’t easy. The grey market trading in shares doled out to employees is illiquid. The private company discloses limited data. But Facebook is growing at a breakneck pace — it now has almost 500 million users, almost twice as many as last summer. The company has said it is cash-flow positive, but profit, and Facebook’s ability to scale up, are still unclear.
So consider revenue instead. Facebook generated almost $800 million, mostly from advertising sales, in 2009. That’s roughly 2.5 times as much as it did in 2008 based on the buzz in Silicon Valley. There’s potentially plenty of growth to come. The average working adult spends more than 12 hours a week online, yet the Internet accounted for just 13 percent of all ad spending last year, according to ZenithOptimedia. Facebook’s rising popularity means it should be attracting a bigger chunk of a rapidly enlarging pie.
On that optimistic basis, a multiple of 30 times revenue is certainly rich, but not necessarily absurd. When Google floated, its revenue was increasing at a similar pace. The search giant went public at about 14 times trailing revenue, and the stock more than doubled in four months. Sales and the shares both continued to rise sharply.
Yet the comparison’s value stops there. Revenue is nice, but it’s not profit. Google charged into the black earlier on. What’s more, Facebook’s expansion relies on places such as India and Russia, where many customers are relatively poor. And the company’s ability to generate more cash from existing users may be hamstrung by privacy concerns. As a business, Facebook has promise. But investors appear to be way out in front of it.