Will 2011 be the year that Facebook’s value gets real?

December 28, 2010

By Robert Cyran and Rob Cox

Facebook may at last become a real, rather than virtual, money spinner in 2011. The social network doesn’t need capital to grow, but expectations from backers and employees for an IPO are too high for founder Mark Zuckerberg to ignore. There’s just one challenge: trading in Facebook’s unlisted shares values the website at more than $40 billion. Getting to that number requires some astonishing growth assumptions.

That’s not to say it’s impossible for Facebook to attain a public market value at least as big as its current implied worth. Facebook is both valuable and becoming more so. It has more than 500 million users and it’s adding thousands by the minute. But rarely has a private company attracted such a large — and relatively liquid — financial status as Facebook.

So how can the firm founded in a Harvard dorm room fill out its $40 billion-plus britches? Facebook should double revenue to $2 billion this year. If its margins are in line with Yahoo’s, that would suggest it makes about $300 million in profit. Thus its implicit valuation is somewhere around a stratospheric 133 times earnings.

But there’s another way to look at it. Using a standard earnings growth model, Facebook could warrant its private-market value if it can grow its bottom line more than 25 percentage points faster than the average company for the next decade. Few firms ever manage to sustain this type of performance. Microsoft and Google may be among the few that managed something like it in their heydays.

Put another way, despite consumers spending perhaps a third of their media time online, the Internet accounts for less than 15 percent of all advertising dollars. Simply closing this gap would amount to $50 billion in additional ad revenue, according to Morgan Stanley. If Facebook could nab half of that, at Yahoo-style profit margins it would earn some $4 billion in annual profit — possibly enough to justify its valuation.

It’s still a very long shot. Even though Facebook’s web audience comes second only to Google’s, extracting more revenue from users could be problematic and set off privacy concerns. Users may simply grow fickle, as they did over at MySpace. And advertisers may never become as comfortable advertising online, particularly in the racier medium of social networks, as they are on, say, network broadcasters or billboards.

So although a Facebook IPO is something that may become real in the coming year, it’s harder to tell whether the same will be true of its heady valuation.


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FaceBook’s value here is way overestimated. While it’s true that FB gets new registrations on a daily basis, what’s NOT mentioned is the amount of people deleting their accounts on a DAILY basis as well!Just Google it and you’ll see! (I deleted my account about a month ago as well as 20 of my friends.)Even the link by DG above me shows a slow down on FB due to a saturation. FB better do something now money wise before it suffers the same fate as MySpace did.

Posted by lvlvlv1 | Report as abusive

Next year, Facebook will have a huge task of measuring how many users are real and how many are ghosts!
It’s one thing many internet companies have been subjected to and Facebook will likely be under the same hammer come 2011
Happy Facebooking, Mark:)

Posted by MMutimba | Report as abusive

Remember, spam will ultimate (ok, might) cripple the service, and people will definitely move away toward other platforms. Then, the value of Facebook will definitely go down significantly.

Facebook’s value is merely dictated by the number of users, and nothing more.

Posted by wintdkyo | Report as abusive