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Thursday, March 8, 2012

Is Facebook Worth $100B?

Facebook will possibly go public with a $100B valuation.  Below are some of the important metrics pulled from the S-1 to determine whether that's a reasonable number or not.

Advertising Market Metrics (2010)
Total Advertising Market: $588B
Traditional Ad Spend (TV, Radio, Print): $363B
Online Ad Spend: $68B

Facebook Metrics (2011)
Revenue: $3.7B
Operating Income: $1.75B
Operating Margin: 47%

Analysis:

Online Ad Spend as % of total: 11.5%
Facebook Revenue as % of total online spend: 5.4%

Back of the envelope:

  • If online ad spend grows to 20% of the total ad market in 2015 (above estimates published in the S-1), online spend would be about $120B.  
  • If Facebook grew its market share of online spend to 9% (currently FB is ~7% of all internet traffic), this would represent about $11B in revenue based on that market size.  
  • With 47% operating margins, Facebook would earn about $5B in EBIT on that number.  
  • This means that for $100B Facebook would still trade for 20x operating income (GOOG trades at 17x currently).  
  • This scenario would imply that Facebook would be flat from its initial valuation, i.e. give 0 return to investors.  
  • If an investor wanted 10% per year for the next three years from the initial valuation, Facebook would have to be worth $133B in 2015, or 27x operating income--it would also have to grow EBIT at 41% per year for the next 3 years (it grew at 71% in 2011).


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