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Is Facebook worth $50bn?

Rory Cellan-Jones | 13:13 UK time, Tuesday, 4 January 2011

Is Facebook really worth $50bn (£32.3bn), more than the likes of eBay or Yahoo, as its latest investment from Goldman Sachs and Russia's DST suggests? The simple answer is if they are willing to pay that price, then yes, just as a garage in Mayfair is worth £100,000 if someone is prepared to stump up the cash.

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Let's have a quick look at the opposing views of this sky-high valuation.

The case for
 

1. Unlike all those crazy dotcom businesses of the late 1990s, Facebook now has substantial revenues - thought to be $2bn in 2010. What's more, it's raced past the 500 million user milestone and is heading rapidly towards a billion - and that means there's a huge surge of growth in revenues on the horizon.

2. It isn't just earning money from display advertising, but from virtual goods sold in games and from all sorts of clever wheezes which allow businesses to exploit Facebook's social graph. And that will mean the social network will start sucking revenue away from that other great web money machine Google.

3. Google's history is of course another reason to be cheerful about Facebook's valuation. There was huge scepticism about the value put on the search firm when it floated - but those who invested back in 2004 at $85 a share are looking pretty smug now, with the price at roughly $600.

4. It's Mark Zuckerberg who provides the strongest case for yes. Throughout Facebook's history, its founder has been told by older and wiser heads that he should be selling up, or floating the company, that each new valuation - from $1bn to $15bn to $35 billion - is mad. And each time he has been proven right in his belief that Facebook's growth story has far to go.

The case against

1. The plain truth is we know very little about Facebook's finances because it is a private company - though regulators in the US are beginning to ask pointed questions about a business which appears to be enjoying all the benefits of an IPO (a stock market flotation) without any of the burdens. Even if that $2bn is accurate, that's revenues not profit, so we are back in the era of dotcom valuations, where analysts would think of a number and then multiply it by 25 to work out a company's worth.

2. Facebook has proved that it can lure advertisers to a social network, and that it can persuade millions to spend many hours on the site, where they can be engaged with by businesses. But the jury is still out on how eager Facebookers are to spend time "liking" Coca-Cola or Starbucks, rather than flirting with friends or discussing Justin Bieber's new hairstyle.

3. Google users are very different from the Facebook crowd - they see it as a utility rather than as a place to hang out. In other words, they are in the mood to look for products and services, which is what makes the search engine such a powerful advertising platform. Perhaps the Facebook crowd is changing, and it's certainly grabbing a lot more of its users' time. But Google saw revenue double in the year after its IPO - and more importantly it saw its profits treble. Can Facebook really do that in the next year? If not, it won't look like a $50bn company.

4. Ah, but this one is difficult - the sheer determination and focus of Mark Zuckerberg in sticking to his vision of what Facebook could become continues to impress. The case against such an outlandish valuation is strong. But those who have bet against Facebook's founder are not looking too smart today.

My bet is that we will see a Facebook IPO within a year - and at a value of $50bn or more.

What happens after that, though, is anyone's guess.

Comments

  • Comment number 1.

    I'd like to think that Zuc's is holding out for more than just money.

    The whole idea that Facebook is for a public good has ideal if no real merit. The impression he gives me is Steve Job's like, that he doesn't want an outside investor telling him what to do to maximise stakeholder value.

    He knows that a facebook subsciption service or sponsored comments etc would drive down usage and therefore value.

    I think you should also attribute more of its monatary success to it's takeup by the advertising companies. It's not just about liking a product, it's about products finding a home on Facebook that gives it identity. That's something very difficult to establish through traditional advertising methods.

  • Comment number 2.

    Crazy times... Looking forward to seeing what happens in 2011!

  • Comment number 3.

    The case against

    5. Social Networking trends are like a swarm of locusts: they descend somewhere, eat their fill, then move on. In a couple of years everyone might well have moved on elsewhere. IMHO, Facebook is currently riding atop its very highest wave, and is already approaching "Oh, I don't login to Facebook very often any more".

    Rupert Murdoch discovered this effect with Myspace.

  • Comment number 4.

    @3

    Indeed, I've planned to have a Facebook "holiday" for a while, and after the New Year I put my account in to hiatus. Not sure if I will return or not.

    As for the advertising, I had already blocked the advert images, but once someone develops an all encompassing advert-blocker for Facebook, then who knows what it'll be worth.

  • Comment number 5.

    Will Facebook continue to generate revenue and growth like this when users realise how much sensitive personal information they've supplied through it to the world, forever? Potential employers, government departments and security services can learn rather too much about less discreet Facebookers.

  • Comment number 6.

    I don't believe it is. It's only value is to advertisers, keen to reach a share of over 500 million people. BUT... are those advertisers seeing increased sales as a result of their expenditure? Many, many people simply ignore the ads on FB. If they're not buying, then the advertisers will leave...

    In itself, Facebook doesn't offer a compelling enough reason for people to stay loyal. MySpace appeared to: people invested a significant amount of their time customising their profiles and adding loads of pics, music, etc., yet even they left in droves when MySpace's changes made them dislike the experience. All Facebook is, is just a messageboard for your friends. In the grand scheme of things, it's not that important, and in one, two, or five years, it will be superseded by something else. My advice to Zuckerberg would be 'cash in while you can'!

  • Comment number 7.

    I think facebook can and will do better than it is doing even now. The on site advertising is in no way 'In your face' such as previous social networking attempts. Also, it covers all of the things users want to do there.

    On older social sites, people would often complain about a horrible design, lack of services, too much advertising - yet on facebook, none of this is an issue, nor do I see it being one.

    What facebook does have is an ambition to be the best social network, not to make the most money. Sure, it does generate an income, but I don't think it's their primary goal - so long as they at minimum break even.

  • Comment number 8.

    Many people don't use their Facebook accounts anymore even though their profiles are still up. Therefore the number of active subscribers is vastly overestimated and this company is overvalued.

  • Comment number 9.

    What is Facebook worth?
    Who knows?
    There's been no disclosure, no regulatory scrutiny.
    Goldman Sachs wants to raise $1.5B for Facebook; it wants to raise this money from “sophisticated investors”; and then, it wants to invest another $450M.
    What kind of game is this?
    I'm not sure, but I have a name for it; it's called "disregard accountability" or "step around the securities markets' regulations".
    I’m a little surprised that the SEC hasn’t slammed the breaks on this "investment opportunity".
    A quick check of Facebook shows that it has already received (from the SEC in October of 2008) - “Exemptive Relief from Registration under Section 12(g) of the Securities Exchange Act of 1934”.
    The exemption was granted because the shares Facebook intended to issue were intended to be “restricted stock units (“RSUs”). In other words, the Company proposes to grant to employees, directors and certain consultants of the Company under its 2005 Stock Plan (the “Plan”).”
    Enter Goildman Sachs with its Special Purpose Vehicle (SPV), which will become the structure for the new investments. The SPV has been organized so, even though Goldman Sachs is soliciting new investors, it does not cross the 499 investor threshold. Going over that number would demand public financial disclosures by Facebook. Hmmmm...
    SPVs and SIVs are legal entities that are generally used to put investments into limbo - not subject to scrutiny or audit.
    These off-balance sheet structures were the vehicles used by Enron, for moving subprime assets off the books at Citigroup (and other banks), and for hiding bad assets at Lehman.
    All I'm saying is that Facebook's value is impossible to know unless you are an insider. To me, it just seems like more Goldman hanky-panky.
    What's to stop Godlman from using Facebook as collateral for debt? Goldman's tighwalking the regulatory rules causes me pause.
    Would you invest money in a company whose books you've never seen?
    You probably would if you and Goldman were thick as thieves, and therefore you had an insider's perpective and knew exactly how you were going to get rich(er).
    Facebook is dismissing a near-term IPO with this argument: high-growth technology companies can’t afford the cost or interference of messy regulation and compliance. Excuse me? They can't afford not to if they want to go public.
    Facebook restricts access to their financial information.
    Goldman manages the Facebook SPV used to market “shares” of Facebook to sophisticated investors. Goldman has access to Facebook’s books but outsiders, like you and me, do not...unless through Goldman.
    Facebook likes to say they have $2B in revenues but who really knows? Advertising revenue is one thing – although easily manipulated. But “transaction revenue” that could get even fluffier.
    Facebook thinks regulatory control over the securities markets, accounting requirements that protect investors, and legal compliance with these laws and regulations is a “distraction.”
    Facebook’s CFO is not an accountant, is not a CPA. Given estimates of Facebook’s “valuation” and expected market capitalization post-IPO, I wouldn't touch this deal with a ten-foot pole, but then I am not a Goldman "sophisticated investor", are you?
    Something fishy here.

  • Comment number 10.

    >> What's more, it's raced past the 500 million user milestone and is heading rapidly towards a billion

    How many of that total are actual users likely to actually buy anything?

    I know of 3 Facebook profiles that look more like Rabbits than people! There are plenty of others created for the sake of cheating at FarmVille.

    I wonder if they factored that into their valuation of $50 Billion. They can't have looked that hard at things when they valued it...

    If it only made $2 Billion in revenue, then surely that is all it is worth, plus assets?

  • Comment number 11.

    Surely that's $0.85 and $6.00 per share?

  • Comment number 12.

    @Stratosphere, should a company be worth its sales + assets...

    The process for valuing a company is complex and there are several methods, see this page for more information.
    http://en.wikipedia.org/wiki/Business_valuation

    The 50bn figure is likely based off the fact the the sources have said that the investment has a value of 500mm and in return the investors have received 2% of the current available shares. This would potentially value the company at 50bn. (Although note that the FT has given the company a lower value and lower investment figures, so this is all finger in the air stuff anyway). frankly it is all finger in the air anyway since the investment is likely based of future growth + investments and a good sales team

  • Comment number 13.

    I have two facebook accounts but have not logged into either of them for past 6 months. I think judging by number of accounts is grossly inaccurate. Number of people actually logging into the site everyday would provide better figure.

  • Comment number 14.

    The thing really is that when people use google they often search for certain product or service and letting them know about your product or service makes a lot of sense there.

    But in Facebook? I am not searchign for anything there. Sure some peopel play games, some chat, but they are not searching for anything. It like you have a chat with a friend on the street and then someone comes to you offering you watches or something. I wouldn't be interested.

    Regarding users people starte making new profiles because old ones had too many of so called "friends". I know a few of those including my relatives. they have their 3rd or 4th profile.

    also i would be really interested to invest into some company if i didn't know their profits and some plan of growth (of profits not revenues).

  • Comment number 15.

    14. At 12:19pm on 06 Jan 2011, gregor3000 wrote:
    ...But in Facebook? I am not searchign for anything there.
    -----------------------------------------

    They know what you are chatting about, what links you post or follow, what you write in messages and what your friends are doing too.

    A few clever automatic trawls through all this and they have a very good profile of you that advertisers can trust pretty well.

    As for changing to new profiles... just unfriend a bunch of people now and again, after all they are not really friends!

  • Comment number 16.

    Facebook must drive a lot of their income from Facebook advertising, just like Google do from GOogle Adwords and I think that in some instances the advertising platform that Facebook offers is better than Googles, see my blog post on why facebook advertising is valuable over at Polished Media

  • Comment number 17.

    This valuation makes no sense.

    If facebook is worth the money because of its 500m users how about this..

    I give 500m people $50 to quit facebook and join my new site "newbook"
    Ive spent 25bn, I now have a site with 500m users and ive spent 25bn, but I must be worth 50m if facebook is. So I just made 25bn

    the web is very fickle

  • Comment number 18.

    oh, on 2billion revenue (not profit) the valuation is 25times revenue..

    googles p/e is 25 but thats profit to earnings.

    So you have to assume all 2billion is profit for facebook. And facebook is a one trick pony while google is an established set of complimentary businesses with relative stability.

  • Comment number 19.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 20.

    I don't think it is even worth $5 in its current condition

 

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