Facebook – It is worth the $100B price tag?

With Facebook ready to make its Wall Street debut, its worth debating what the value of the social network is. By any mean the world’s biggest social network is an incredibly valuable platform for advertisers in terms of reach and engagement.

(If you haven’t been bombarded with the numbers already …)

900 million monthly users … 7 hours per month / user … 500 million mobile users … 3,600 very skilled developers and business staff working hard

But, is the it really worth $100B? The bulls will say the hard part is done – they’ve got the users and people spending time on the website. Let’s for a moment give Facebook full credit for that – the back of the envelope still suggests that the valuation is rich by comparison to other media properties. Here’s my quick calculation—I assume that Facebook was able to monetize each user-hour at the same rate as the average of Google, Yahoo, and AOL Media:

Revenue / User / Hour for major web properties for US Users

Brand Unique Audience (US) Time / user / month (hrs) Total Time (M of hours) US Revenue ($, M) Rev / User / Hour
Google + Youtube 302,392,000 3.40 520 $17,560 $2.81
Yahoo! 142,691,000 2.45 350 3,303 0.79
AOL Media Network 86,268,000 2.73 236 2,001 0.71
Average online properties $1.44
Facebook 152,763,000 7.15 1,092 18,819 1.44

Sources: Neilsen, Capital IQ

According to this data, for every hour a US user spends on these sites it makes the site $1.44 in revenue /hour (most of the revenue for these businesses is driven by advertising). If Facebook were able to monetize at that rate it would be able to generate $18.8B in revenue from the US alone, and using Google as a proxy, could generate $43B in worldwide sales. In general a fast growing company maybe valued at 2-4x its revenues yielding around $90-130B valuation for Facebook

Note: Facebook advertising is much “softer” today. Its less sales driven and much more engagement driven, which is harder to value for advertisers. Google for reference is valued at $165B, and though it commands lower engagement from users per month, because of the nature of search marketing is able to command a premium per hour of the user’s time.

But to get here, Facebook has a lot of ground to cover:

1) It needs to experiment with its revenue strategy to get from $4B in sales to $43B in sales – and hold the attention of big name advertisers like GM.

2) Its got to figure out the mobile space with a better app (just look at the abysmal ratings in Apple’s Appstore) and monetization platform for mobile before someone else does

Bottom line: No doubt Facebook will be hard to displace and is here to stay for a while, but from an investor’s point of view it seems richly valued. Only if Facebook was able to monetize each user hour like Google, AOL and Yahoo would it be valued in the range it is today, but that’s still a while away and there are risks along the way.

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