$100 billion: That’s the number that has been tossed around Wall Street in recent weeks as the social-networking juggernaut quietly began the process of becoming a publically traded company. Yesterday, investors finally got the information they needed to make a more informed choice as Facebook filed papers with government regulators declaring its intent to sell stock to the public.
Facebook’s Closely Guarded Secrets
Facebook’s hotly anticipated initial public offering (IPO) filing briefly crashed the Securities and Exchange Commission’s website last night, as gaggles of investors and financial journalists downloaded the massive S-1 document.
Facebook’s S-1 was full of information and little factoids that, up until now, were closely guarded secrets of the notoriously enigmatic Silicon Valley phenom. For the first time, the public saw how much money Facebook has made over the years — and how it spends it. With this information finally public, investors can now come up with their own valuation for Facebook.
A $100 Billion Valuation
Founder Mark Zuckerberg (along with a whole slug of investment banks and big private investors) think that a $100 billion valuation is right on the money for the company. That would mean Facebook, an eight-year-old company, would have a higher valuation than more-established giants, like Goldman Sachs or Amazon.com. Zuckerberg would become worth around $26 billion if the $100 billion figure came true, making him one of the world’s richest men at the tender age of 27.
Determining the value of Facebook is equal parts art and science; there are thousands of things to consider and hundreds of moving parts. But at its core, a company’s stock price is basically worth the present value of its future cash flows, augmented by the firm’s propensity to grow is revenues.
How Does Facebook Stack Up?
Well, the firm is rapidly growing its revenues, which is a good thing. But revenue growth, although still rapid, has started to show signs of slowing down. In 2010, Facebook’s revenues jumped up 154% from the previous year to $1.9 billion, as the firm started to rapidly expand across the country. But last year, revenue growth was up by just 88% from 2010 at $3.7 billion. The slowdown in growth is very troubling, as it means that the firm’s earnings potential may not be as great as some might have hoped.
Investors are happy to pay a premium for a company if they see it rapidly expanding. While Facebook is expected to continue growing its revenues, it may not be as fast as some investors expect, given the high valuation that the company claims. After expenses, Facebook made $1 billion in profits last year (valuing the company at 100 times earnings). Multiples that high have not been seen since the dotcom heyday of the late 1990s. To put it into perspective, Google currently trades at 20 times its current profits.
It’s hard to really make out the firm’s future potential earnings power given some uncertainties. The company warned in its S-1 that users may eventually lose interest in the website (remember MySpace and Friendster?).
Additionally, Facebook depends on advertising to supply 85% of its revenues, with one company, Zygna, the online social-gaming company, providing 12% of that revenue. A slip in advertising dollars could send revenues plummeting. To make matters more complicated, Facebook is concerned that more and more people will choose to access Facebook via their mobile phones. That’s a problem, as they have not developed a way to advertise neatly through smart phones just yet.
Will Investors Agree?
Facebook’s valuation will ultimately be determined in April when its shares hit the market for the first time. The bankers will announce Facebook’s initial stock price usually the day before the stock goes on sale to retail investors. The firm valued its class B stock at around $30 a pop in December. It will be interesting to see if investors agree with that number.
Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati