Friday, April 22, 2011

The End of an Age - Facebook's Valuation Peak

In the style of Carl Futia's contratian blog:

Above is a pyramid of images of facebook founder, Mark Zuckerberg; two magazine covers, and the facebook story inspired movie poster.

The first cover image in this post is from the most recent cover of "Success Magazine." The subtitle is "Facebook Age" and Mark appears with gilded hair and a radiant, almost angelic, backdrop. The second cover titles Mark as Time's Person of the Year. Finally, once more his visage appears incarnated by a movie star for the hit 2010 film, The Social Network.

The value of facebook has become a topic of media obsession, as if it were a publicly traded. The fact that it is private company and its value has this much coverage is a sign in itself. The images above suggest that the most enthusiastic expectations one can have of facebook are now priced in to the company. As is said of growth companies that are "priced to perfection," the best they can do is meet or fall short of expectations.

The most recent estimates floating around is that Facebook, Inc has $2 billion in revenues (sales) and is worth $50 billion. It is thereby valued at 25 times sales.(There are more recent, higher numbers for valuation out there, but I don't know the degree to which they are substantiated.)Apple Inc is trading at around 4 times sales, and Google at about 5.5 times sales. If Facebook were to triple its revenues at this mature stage, and be given an upper end multiple of 6X sales, its value would be $36 billion, a 28% decline from its most recent valuation. As such, one can reasonably conclude that Facebook is overvalued and will be valued significantly lower than it is now in the coming years. And what about the other fledgling internet darlings?...

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