Following the recent collective investment of $500 million in Facebook by Goldman Sachs and Russian investment firm Digital Sky Technologies, there has been an onslaught of media coverage, as well as a ton of discussion in the blogosphere and Twitterverse, asking the $64,000 (well, let's add about six zeroes to that for accuracy) question: what is Facebook really worth?
Estimates about Facebook's valuation are all over the map, even those by so-called industry insiders and deeply-informed financial analysts, and range from a modest $15 billion to the more widely-reported figure last week of $50 billion. The broad spectrum of forecasts has been fueled by widespread speculation concerning the timing and scope of Facebook's future initial public offering (IPO), rumored to occur some time in 2012, and Goldman Sachs' recent offering of private shares in the social networking company to its preferred clients. An editorial in my hometown newspaper, the Ventura County Star, even compared the $50 billion valuation, which the author felt was outrageous and unfounded, to the heady days of the dot-com era when many companies were both overvalued and unprofitable.
I wouldn't go that far. While $50 billion may be a stretch, Facebook is the real deal and is here to stay — it warrants a multi-billion-dollar valuation. Here's why. Based on reports last week in the Wall Street Journal, and according to individuals with knowledge of Goldman Sachs’ offering to investors, Facebook generated net income of $200 million on revenue of $777 million in 2009. While revenue and net income figures for 2010 have not been disclosed as of this writing, multiple financial analysts and tech insiders collectively estimate Facebook’s 2010 revenue to be approximately $2 billion, driven primarily by tremendous growth in its online advertising business. Indeed, this is a far, far cry from the dot-com days, when so many companies had ZERO revenue or products on the market, and it's certainly nothing to sneeze at. But $50 billion, 25 times last year’s revenue? No way!
More than likely, based on revenue and growth rates right now, and augmented by conservative forecasts regarding its future operations, Facebook is legitimately worth $10-15 billion at the present time. There's no doubt that, like the Google IPO in 2004, the company can command a multiple of 2-4 times this in the equity markets once it becomes public. But is CEO Mark Zuckerberg, and TIME's Person of the Year for 2010, willing to withstand the Securities and Exchange Commission's ongoing scrutiny? Only time will tell.
And speaking of time, let's take a look at how Facebook's valuation has changed since its founding in 2004, as reported in this great piece by TechCrunch. Click on the image for a larger view of the rising curve:
Estimates about Facebook's valuation are all over the map, even those by so-called industry insiders and deeply-informed financial analysts, and range from a modest $15 billion to the more widely-reported figure last week of $50 billion. The broad spectrum of forecasts has been fueled by widespread speculation concerning the timing and scope of Facebook's future initial public offering (IPO), rumored to occur some time in 2012, and Goldman Sachs' recent offering of private shares in the social networking company to its preferred clients. An editorial in my hometown newspaper, the Ventura County Star, even compared the $50 billion valuation, which the author felt was outrageous and unfounded, to the heady days of the dot-com era when many companies were both overvalued and unprofitable.
I wouldn't go that far. While $50 billion may be a stretch, Facebook is the real deal and is here to stay — it warrants a multi-billion-dollar valuation. Here's why. Based on reports last week in the Wall Street Journal, and according to individuals with knowledge of Goldman Sachs’ offering to investors, Facebook generated net income of $200 million on revenue of $777 million in 2009. While revenue and net income figures for 2010 have not been disclosed as of this writing, multiple financial analysts and tech insiders collectively estimate Facebook’s 2010 revenue to be approximately $2 billion, driven primarily by tremendous growth in its online advertising business. Indeed, this is a far, far cry from the dot-com days, when so many companies had ZERO revenue or products on the market, and it's certainly nothing to sneeze at. But $50 billion, 25 times last year’s revenue? No way!
More than likely, based on revenue and growth rates right now, and augmented by conservative forecasts regarding its future operations, Facebook is legitimately worth $10-15 billion at the present time. There's no doubt that, like the Google IPO in 2004, the company can command a multiple of 2-4 times this in the equity markets once it becomes public. But is CEO Mark Zuckerberg, and TIME's Person of the Year for 2010, willing to withstand the Securities and Exchange Commission's ongoing scrutiny? Only time will tell.
And speaking of time, let's take a look at how Facebook's valuation has changed since its founding in 2004, as reported in this great piece by TechCrunch. Click on the image for a larger view of the rising curve:
The Wall Street Journal has a slightly different take on these figures in this story, which also analyzes the fluctuations in Twitter's valuation since 2006.
This will definitely be a situation to keep close tabs on, particularly since hot social media companies, such as Groupon, continue to generate huge venture capital investments and are constantly eyeing billion-dollar IPOs and exit strategies.
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