Facebook Valuation Pre-IPO: My Estimate

The wait is almost over: the biggest technology Initial Public Offering (IPO) in years is coming next Friday. We will all be able to own Facebook shares when the stock is introduced with the FB ticker symbol. The price per share of the stock will most likely start at the height of its ipo range, at $35. The question is: will it be worth it?

Before we begin, let me clearly state that my analysis here is just for fun: I am NOT a financial advisor, and you should do your own analysis and get professional advice before making any investment decisions. For all I know, Greece could default on its debts causing the world economy to collapse, and we could be trading chickens and pigs for currency tomorrow.

If you want to skip my analysis and just get my predicted FB value per share (and miss all the fun!), just scroll down to the end of the posting.



Moving on: Facebook announced earnings for the first quarter on April 29th. They made $1B in revenue, and $200M in net profit with 3300 employees. When valuing a stock, most analysts like to compare the pre-IPO company to their closest competitors. In my opinion, there are three good candidates out there.

First up is LinkedIn (Ticker: LNKD), which is similar to Facebook because of its social media status. They have 2500 employees, and in their May 3rd earnings report, they reported revenues of $188M for 3 months, and net income of $5M. The company is valued at $11.5B.

Google is next up as a competitor: they will be competing with Facebook in internet search and ad dollars. Google (Ticker: GOOG) has 33,000 employees, made $10.7B in revenues last quarter, and earned an obscene $2.89B in net income in the last quarter. The company is valued at $200B.

Finally, there is Microsoft, a competitor for software talent, internet search and ad revenues. Last quarter, they made $17.5B in revenue, $5B in net income, and a market cap of $258B with 65,000 employees.

The important statistics regarding Facebook and my selection of its competitors are outlined in this table. Google scales up to Microsoft almost identically, so I will use an average of these two companies for the valuation exercise.

FB shares nearly identical employee efficiency with GOOG and MSFT. Therefore, using revenue as the scaling factor, FB should be worth about ((285000 + 200000)/(10700 + 17500)) * 1000 =  17.2B.

Again comparing FB with GOOG and MSFT using net income as a scaling factor, FB should be worth about ((200000 + 285000)/(2890 + 5000)) *205 = $12.6B

Let's assume that Facebook will grow like LNKD. If that is the case, the value of FB based on LNKD's "goodwill" (an accounting term that represents subjective investor optimism) revenue ratio will be (11500/188) * 1000 = $61B.

If we use the goodwill net income ratio, we get (11500/5) * 1000 = $230B

Now I have four wide-ranging valuations for Facebook, including the last two which I feel are somewhat stretching true valuation upwards. However, if we weigh these factors equally (two objective factors and two subjective factors), we arrive at (17.2 + 12.6 + 61B + 230B) / 4 = $80.2B

If I use the expected market valuation of $100B for the expected share price of $35 at the market open on Friday May 15,  my predicted $80.2B valuation of Facebook will result in an expected share price of (35 / 100) * 80.2 =   $28.70. Author Douglas Adams' Hitchhiker's Guide to the Galaxy posits that the answer to all of life's greatest questions is 42. Therefore the answer is either $28.70 OR $42 per share!


I can't wait to follow up this posting after close of market on Friday, May 15th. Then I will be able to provide a measure of the rationality of current market psychology! Anyone willing to take a wild guess as to the first-day closing price of Facebook?

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