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Is Facebook worth $100 billion?

india Updated: Nov 29, 2011 16:29 IST
N. Madhavan

Is Facebook going public, finally? Speculation on a long-awaited move by Mark Zuckerburg’s planet-shaking social network has caught fire with the Wall Street Journal reporting that the company is in discussions for an initial public offering (IPO) of shares.

While that should surprise no one, the real stuff is in the timing (April-June next year) and the valuation ($100 billion or R 519,238 crore) – which is more than double that of India’s most valued company, Reliance Industries, at about R 256,400 crore.

Now, Facebook Inc has 800 million users, and is growing at a frenetic pace. But details are critical.

Can the US market sustain a blockbuster IPO when the world economy is far from out of the woods? As this is being written, the European economy is in deep crisis – and chances are high that status updates on Facebook across the continent from the UK to Greece reflect this somber mood.

More significant is the valuation of $100 billion. According to some estimates, Mark Zuckerburg, at this run rate, is worth $24 billion – and that would put him ahead of Google founders Larry Page and Sergey Brin. Consider that Facebook’s estimated revenue in 2011 is $4.27 billion according to research firm Emarketer. This means the talked-about valuation would be at roughly 25 times the revenue. In India, Sensex companies are considered valued at healthy rates when the price-to-earnings ratio is upwards of 20, which means the valuations are 20 times that of net profit, which are only a fraction of revenues.

A heady valuation is usually given when the growth is dizzy. Facebook’s revenues was only $2 billion 2010. Even then, we are talking revenues here, not profits, though attractive global companies do fetch higher price-to-earnings ratios.

So, what gives?

The charm of Facebook lies in the fact that apart from heady revenue growth, it is a virtual monopoly. Its advertising model is riding piggyback on Google’s search ad style, and yet retains its unique identity as the world’s most popular social network, with no competitor considered significant at this point.

Its virtual currency programme, called Facebook Credits, which lets users buy items in games, is estimated to fetch $470 million this year – more than three times its $140 million last year. That is a clear path breaker.

Last, but not the least, Facebook is expected to overtake Yahoo as the top seller of display advertising in the US this year. Now, troubled Yahoo’s market capitalization is only $19 billion this week and is in facing takeover talks again.

As Zuckerburg gears for the blockbuster, he needs to only consider the sober idea that Yahoo was once talked about in the same vein as Facebook. Tomorrow, always, is another day.