A giant 'like' icon made popular by Facebook is
seen at the company's new headquarters in Menlo Park, California.
By Martha C. White
Facebook was famously born in a Harvard dorm room, which might be why its much-hyped valuation of $75 billion to $100 billion seems to suffer from grade inflation.Facebook pulled back the curtain on some of its financials in its IPO filing yesterday, and analysts started combing through it immediately. Even the ones who are positive about Facebook's long-term potential — and not all of them are — concede that a valuation of up to $100 billion basically bakes in the assumption that the social network will become the next Google — or better.
The divide seems to be between those who think Zuckerberg and his team have the chops to live up to their early potential, and those who don't.
But a valuation even at the low end of the $75 billion to $100 billion range that's been thrown around is out of sync with the revenue and income numbers in its filing statement. At $75 billion, Facebook would be worth about 40 percent of Google — a company that had profits about 11 times Facebook's. What's more, some analysts already see signs that Facebook's momentum is slowing.
Facebook shares traded privately at just around $30 a share in the fourth quarter of last year, which would give the company a valuation of $80 billion, give or take. (In the wake of its filing, that figure jumped to nearly $90 billion.) Its net income of $1 billion last year also offers encouragement to the argument that $100 billion is plausible.
"This is a single most important filing and IPO to come around probably since Google, and Google did not have nearly the brand recognition and ubiquitous nature" Facebook enjoys, said David Menlow, president of IPOfinancial.com.
Google didn't face the same competition for online ad dollars and eyeballs when it went public in 2004, either.
"This is where some of our optimism tempers a bit," said Rick Summers, senior equity analyst at Morningstar. Google's "silver bullet" was the development of its AdWords platform. "We had a performance-based advertising system that provided an immediate, measurable return on investment for advertisers. Google really defined the category and the trajectory of that market," he said.
"There's been so much hype about Facebook, but I don't see it supported by the numbers," said Francis Gaskins, president and editor of IPODesktop.com. Google has a market capitalization of 19 times its net income, he points out. Assuming that Facebook is in the same league as Google, that would only give it a valuation of $19 billion.
There are other skeptics, too.
"The big question is, Can Facebook maintain its growth rates?" said Sam Hamadeh, CEO of research company PrivCo. While Facebook prefers to focus on its monthly active user base and global growth, Hamadeh said that a look at more mature markets shows signs of trouble ahead.
Morningstar's Summers also pointed out that Facebook will hit a wall, so to speak, in its growth when it comes to China, where access is restricted.
Menlow, for one, isn't ruffled by these projections. Even if growth of new users slows, the company can offset that by figuring out how to make more money from existing users. There are two main channels for this, both of which Facebook is already using.
The first is advertising. Facebook has an unparalleled amount of detailed, intimate data about its users, and a platform that can unlock the value of all those links and likes for advertisers will go a long way toward bolstering its bottom line.
But Facebook can also earn money from users directly. Last year, 12 percent of its revenue came from its relationship with Zynga, much of that in the form of virtual goods bought by players of Zynga's popular games. The flip side of this advantage is that an increasing share of the money Facebook makes depends on Zynga creating the next addictive game. As anyone in the movie business would be quick to point out, it can be expensive to keep chasing after the next blockbuster.
Without a silver bullet like AdWords, Facebook will have an uphill climb trying to sustain growth in ad revenues. While the 69 percent increase it saw between 2010 and 2011 would be amazing for a more established company, the promise of Facebook's sky-high valuation is that its growth will be by leaps and bounds.
And according to Hamadeh, the company is already reaching the outer limit of how many ads it can cram on to a page without turning users off.
"At one point they had two ads per page ... about two weeks ago, you started seeing six and seven," Hamadeh said. Some people are already implementing ad-blocking apps, he added. "That doesn't bode well."