Thursday, February 2, 2012

Facebook Valuation Formula

Facebook is valued at plenty
By Wall Street's high-tech cognoscenti,
Based on 1 billion friends
Times $5 each, then
Times the IPO multiple, 20.

Facebook filed its Form S-1, announcing its intention to make an initial public offering of stock in the near future; millions paused their Farmville games long enough to glean some hitherto unpublished "fun facts" about the social network, which is 28% owned by its founder, Mark Zuckerberg. Soon to be traded under the ticker symbol "FB", Facebook had 2011 revenue of $3.7 billion, a 47% operating margin and a cash balance of $3 billion. The company's social impact has been much greater, according to The Wall Street Journal:

In just eight years, Facebook has become the world's social bazaar, where friends gossip, play games and swap 250 million photos per day. It has also emerged as a potent political tool, helping to topple regimes across the Middle East last year.
Of course, there are skeptics, many of whom made their snarkiness felt on Twitter. Josh Brown, aka @ReformedBroker, suggested this risk disclosure: "Our business model may prove unsustainable if people realize how little time on earth they actually have." As for the IPO's $100 billion valuation, Wharton economist @JustinWolfers offers this formula: "Facebook valuation for dummies. 1 billion users. FB earns $5/year serving ads to each. NPV = annual profit x20. =$100b!" As they say, good ideas were meant to be stolen (thank you, Justin)!


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