What´s a fair valuation for facebook?

26 January 2011 Sören Zschoche 13 Comments Investing

A few days ago the Clients of Goldman Sachs and Digital Sky Technologies estimated the value of Facebook at 50 billion USD. As an investor, I have to question what Facebook’s value is to an investor and what it’s value is to a speculator.

Facebook: an investor’s valuation

So lets begin with the view as an investor. An investor would estimate the earnings and the assets and would come to a value he could live with. If it´s an intelligent Investor he would pay less than the real worth of the assets, so that he can make profit. So let´s assume that Facebook’s sales are 2 billion USD . Facebook has more than 1,700 employees, and offices in 12 countries. If we assume that facebook pays an average salary of 60.000 to each of its employees that gives us salary expenses of 102000000 USD. Add to that the costs of the server landscape the EBITDA is probably no higher than 20 to 70 Million USD. If we are fair investors we will probably also pay a price for the Facebook brand. So let´s value the assets of facebook at 2 billion USD. So in the end an investor would probably not pay more than 400 – 500 Million USD for Facebook.

Facebook: a speculator’s valuation

But if we evaluate Facebook from a speculative point of view – and high tech companies are always a speculative investment when they begin to grow – the price of Facebook is probably closer 150 billion USD. The idea is that also google was not that profitable in the first years but google subsequently discovered a way of converting search queries into money. Perhaps you also could convert facebook users. But the question is how to convert facebook users into money? Facebook could have some very interesting answers for this question. Facebook could enter into the ecommerce sector, build little games, sell market research and could earn a lot of money with customized advertisements. But is this really currently worth a valuation of 50 billion USD? Probably not, but there are other ways to earn money. For example by steering facebook users into real brick & mortar shops with facebook places or by offering skype-based voice communication for the price of 50 USD a year. Anyway the basic idea is that if you have 580 million (or even better one billion) Facebook users, if you only make 40 USD from every user, you end up with sales of 23 to 40 billion USD. In 2009 google had sales of 23 billion and a margin of 27 % and today google is worth 197 billion USD.

My own valuation

To be honest I personally don’t really have a valuation for this company, as I really don´t know what I would pay for it. I belive that a possible IPO of Facebook could reach 50 billion USD and the value could also rise in the first few weeks after their flotation. But if the numbers facebook presents don’t impress, the value of facebook will be assessed through the eyes of an investor – and that means the market capitalization will fall to 500 or 1 billion USD. So in my eyes 50 billion is far too much at the beginning. If may perhaps be a fair value when the numbers are right but not yet. You have to remember in 2004 when google went to the stock market the estimates were around

2.7 billion USD and at that time google had 1900 and sales of nearly
1.5 Billion USD. But then again – google was already much more profitable by then.

13 Comments »

  • lisa shaner said:

    now with stocks the only sure way to make money is investing in gold and other precious metals like silver. I dumped all my stocks so that I may make money off of gold. I hope to be rich soon. The precious metal market is looking good. The dollar keeps declining. Great work on your post.

  • Michael said:

    Brilliant article, I always thought Facebook was overvalued, but I never considered from a speculators point of view. You’ve given me some food for thought, thanks.

  • Mike said:

    How do you honestly put a price on something that in a few short years has become, and will continue to grow into a tool that can topple governments and give the people so much power that the U.S and other ‘controlling governments’ must be shaking in their respective boots !?.

  • Beatrice said:

    In my point of view, Facebook will always at least a bit of value as it is used by billions of people worldwide.
    However supposing that Facebook would make its users pay for using its website, well I don’t think that it will have so many users anymore, above all for £40. I guess the former users will just use another website similar to Facebook one, there are already plenty of those websites so they will have the choice, in any case that would be a bad idea to do that.
    Nevertheless, the valuation is really well done and well explained!

  • Rakyoo said:

    You can’t compare facebook and Google, since both have different product. Google is more general service (search engine), search is almost everyone needs on the internet, on the other side, facebook is just a sudden trend, soon it will be replaced by another product.

  • Mark Lee said:

    I agree with the “Rakyoo” comments. There is no comparison between Google & Facebook.

  • Financial Query said:

    The fair/true valuation for Facebook will be 1 or 2 years after they get on the stock traded market.
    We get to excited with Facebook at this time and we may pay lots more that its really worth.

  • Steve waugh said:

    Fair valuation for facebook comes with lots of good feature. So from my views its value is so much to a speculator. Thanks lovely beloved :)

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