$10bn - Is Facebook overvalued?

RWW’s article on FB’s new financing round shows a valuation of USD 10bn for Facebook. This puts it at a multiple of USD 50 per user (assuming 200m active users, the last figure I heard off). This figure compares to recent (and not so recent) multiples:

• Twitter (February 2009 series C) :  ~40$ per user (or ~75$ per active user with a different number crunching but not comparable to the other figures below)
• Xing (March 2009 market capitalization) : ~25$ per user
• LinkedIn (June 2008 series D): $ ~40 per user
• Beboo (March 2008 trade sale to AOL-TW): $ ~40 per user
• YouTube (2006 trade sale to Google): $ ~30 per user
• My Space (2005 trade sale to Newscorp): $ ~35 per user

These multiples are pretty stable across transactions and over time in the range of $30 to $40 per user. Demographics and geographics user mix differences should translate into multiple's differences as pointed out in TechCrunch’s post on the topic. In this light, Facebook’s valuation seems on the high range but not completely out of order compared to those benchmark multiples, especially knowing that it’s the market leader and the past months impressive growth.

 The question is whether these multiples make sense or not from an “operational ” perspective. Mark MacLeod had made some back of the envelop calculation here on Twitter and triggered an interesting discussion. On the other hand as long as there is a market for it…

Comments

[Mark MacLeod]

In my humble opinion, this valuation is crazy. Linkedin can get a premium because it is very good at monetization. Before the credit crisis it commanded CPM rates as high as $ 75 and of course charges direct subscriptions as well. Facebook has neither subscriptions nor the targeting that gets high CPMs. In addition, it has massive hosting costs. This is a bad deal in my books.

[Wallen's]

On the face of their current revenue I agree. It's a ~30-35 revenue multiple which sounds insane.

If one digs more with some back of the envelop calculation, they make roughly $3 per user per year in revenue. Let's assume for the sake of it a profit margin of ~40% at steady state. That makes a profit of roughly $1.2 per user which, with a multiple of say 15, translates into ~$20 per user. So yes overvalued.

However, if you make the bet that Facebook will get new revenue sources/models (e.g., payments systems (see Venture Beat post http://tinyurl.com/r2m2fs) or share of voice (see one of my previous posts http://tinyurl.com/cusflr) revenue per user at $5-7(roughly My Space figures) with the same (or a bit higher) cost base then the value per user goes into the range of $45-60.
All these multiples assume zero growth which obviously is not the case.

As usual, it's a question of faith...

[Wallen's]

one other point that came through my mind that may play a role in the valuation level: the cost of capital of DST. I don't know much about them but from their website they don't seem to be the typical late stage VC firm with its 20% or 30% IRR target. With a lower cost of capital, DST could afford a higher valuation than most VCs.

Just a thought tough. If any one has more information on them on that front, would be interesting to hear about it.

[Ivan Stojic]

I'm surprised nobody mentioned Sun Microsystems. While it does not really belong to the above mentioned Web 2.0 offal, it's an extremely significant tech company and had great potential for success.

7.4$bn :-(

[Wallen's]

@Ivan. Thanks for passing by.
Sun may have low profitability in % but it has significant revenues of $13-14bn... Facebook is nowhere near this at the moment.

[Wallen's]

There was actually a good discussion on this post here: http://news.ycombinator.com/item?id=627202