What's Facebook Really Worth?

Agenda-Setting Financial Insight.
March 22 2012 2:18 PM

What's Facebook Really Worth?

Is a $75 billion valuation for Facebook wishful thinking on the part of the social networking site?

Photo by aaron tam/AFP/Getty Images

Facebook’s 31 underwriting banks are mobilizing for the company’s initial public offering. In such a hyped IPO, any kind of valuation is possible. But a comparison with the history of the social network’s closest thing to a rival, Google, suggests that even $75 billion - at the low end of the talk to date - would be a stretch. A new Breakingviews calculator shows why, and allows bulls and bears alike to tweak the inputs. 

Google’s revenue of $3.2 billion in 2004 was not far off Facebook’s $3.7 billion in 2011. One way to clarify the crystal ball is to assume the social network grows on the same trajectory as the search engine did seven years earlier. Then it’s consistent to assume EBIT margins settle at something like Google’s average 33 percent level. 

Add a 30 percent tax rate and modest outlays for investments, and out pops an annual free cash flow figure to plug into a discounted cash flow model based on one created by Anant Sundaram at Dartmouth’s Tuck School of Business. A 15 percent discount rate seems rational for a business in the fast-changing Internet world, resetting lower - along with revenue growth - after 2021. 

Run those numbers, and Facebook founder Mark Zuckerberg is presiding over a company worth $75 billion, or about $30 per pre-IPO share. But the pricing of run-of-the-mill floats is supposed to leave something - say 15 percent - on the table for incoming shareholders. That would knock the figure down below $65 billion. And with nearly two-thirds of the value stemming from cash flows more than 10 years hence, Facebook is a risky bet. 

For likers of Facebook, however, it’s easy to dial things up. Just trimming 2.5 percentage points off the discount rate, say, adds $15 billion to the valuation. But the valuation is also sensitive on the way down. Shaving just 5 percentage points off near-term revenue growth and margin assumptions knock it down by $10 billion. 

Facebook shares may prove scarce as would-be owners, potentially including many of its 845 million users, clamor for a piece of the IPO action. A staid DCF analysis could easily be drowned out. But it does at least show how bold the assumptions must be to justify whatever price the underwriters end up persuading investors to pay to cement their friendship.

Richard Beales joined Breakingviews.com in 2007 from the Financial Times, where he was the US markets editor and a Lex columnist. Prior to the FT, he spent more than 10 years as an investment banker, based largely in Hong Kong.


Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Crowds March in 160 Countries to Demand Action on Climate Change


Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Sept. 19 2014 1:11 PM Americans' Inexplicable Aversion to the 1990s
  News & Politics
Sept. 20 2014 11:13 AM -30-
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Tv Club
Sept. 21 2014 1:15 PM The Slate Doctor Who Podcast: Episode 5  A spoiler-filled discussion of "Time Heist."
Brow Beat
Sept. 21 2014 2:00 PM Colin Farrell Will Star in True Detective’s Second Season
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 21 2014 8:00 AM An Astronaut’s Guided Video Tour of Earth
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.