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Summary:

This week, tech insiders and observers are abuzz with estimates of how much Facebook is really worth. What set off the latest round of chatter was a Sunday morning Wall Street Journal report that Facebook could have a valuation of $100 billion after an IPO.

mark zuckerberg april 2011

This week, tech insiders and observers joined in on a new round of the industry’s current favorite parlor game: bandying around estimates of how much Facebook is really worth.

What set off the latest buzz was a Sunday morning Wall Street Journal report that Facebook could hold its initial public offering at a valuation of $100 billion. The number came from unnamed company insiders, who arrived at it based on the $2 billion in annual earnings before interest, taxes, debt and amortization (EBITDA) they say Facebook is set to make in 2011.

There’s a lot being said about this, but to me, two particularly salient points stand out from the chatter:

  • Consider the (potential) source.

Skeptics have noted that the WSJ report’s sources could well have some skin in the game. After all, the WSJ article comes just days after an April 27 Reuters report that a group of Facebook shareholders are attempting to sell $1 billion worth of company shares in a secondary market at a price that values the entire company at $70 billion. Those same shareholders had previously tried in vain to offload their Facebook holdings at a price that valued the company at $90 billion, according to the Reuters report, which cited five unnamed sources claiming direct knowledge of the situation.

Could it be that people who are reportedly shopping around their Facebook stock are the same ones talking up Facebook’s valuation to the press?

  • That’s one ambitious valuation!

Even if the $2 billion EBITDA figure is completely accurate, does it make sense to extrapolate a $100 billion valuation from that?  As USA Today‘s Tim Mullaney points out, while a few firms like Salesforce and OpenTable are currently trading at around 50 times EBITDA, most tech industry players are traded at much lower EBITDA multiples. Google is currently valued at 9 times EBITDA, and Apple is valued at 10 times EBITDA. Part of the beauty of the stock market is the mystery of market capitalizations, but valuing Facebook at 50 times EBITDA would place it at the far end of the Bell curve.

From a revenue, talent, and a customer traction perspective, there is no doubt that Facebook is in the big leagues. But until the company pulls the trigger on an IPO or sale, whether it will all translate into a $100 billion valuation is up for debate.

  1. Lucian Armasu Tuesday, May 3, 2011

    Facebook’s valuation seems so inflated. I think even a $50 bn valuation would be inflated. A more accurate valuation may be $20 bn at most. Its valuation grew out of nowhere. I think it grew mostly from the hype about the growing valuation itself (to not confuse it with the hype about Facebook service), which created some kind of speculation loop its valuation.

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  2. 1. Is it $2 Billion a year earnings really true? That would be greater earnings than Yahoo, which has much more premium Ad inventory to sell. I honestly dont believe facebook’s targeted ads are such a big deal. I earn ~ $150K a year, so i should be “well off” customer and all the ads i see are for stupid things like pants and some android apps ..while on Yahoo I see ads for BMWs and Electronics etc.

    2. Are the earnings sustainable? I mean ppl might get tired of farmville in a year or two. Something else might come up. Google is also working on social stuff…so is yahoo etc.

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  3. I dont recollect the last time I accessed facebook on their website. More and more users will access it using mobile and I am not sure if they have identified how they can monetize such user access. I dont have any links to click or ads to see.

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