Valuing Facebook

Facebook is touted to be next thing in the internet world. Facebook which stated as an intranet portal in Harvard and began operation in Feb 2004 and has more than 500 mn active user worldwide by Aug 2010. It has already given giants like Google a run for retaining its best talents.

Facebook Users(in million)
 

Source: benphoster.com

Just having a look at the staggering figures of Facebook

2.6 billion minutes are spent on Facebook every day, which makes 52 minutes per user per day. More than 700 million photos, 4 million+ videos and 15 million pieces of content (web links, news stories, blog posts, notes, photos, etc.) are shared/uploaded every month. More than 52,000 applications are currently available on Facebook Platform (like these and what not) and over 140 new applications added per day. Over 95% of Facebook members have used at least one application built on Facebook platform.

What makes Facebook a Success?

1. Improved privacy: Facebook came up with improved privacy features for users compared to other social networks like Orkut and Myspace. Users were given better control over the content they would like to share. Privacy issue led to an initial surge of Facebook users who shifted from other social networks.

2. Feed from users: It was one of the revolutionary things that Facebook brought to the social network world. Feeds and status updates made Facebook more engaging to the users. It helps to increase the connectivity between users and feeds help in keeping updated about their friends and relatives. It also became a good media to advertise about the various Facebook application, as application used by one user can be seen by all his/her friends.

3. Large photo sharing and photo editing: While most of the other networks restricted the numbers of photos in album, Facebook allowed unlimited uploads and photo tagging and related tagged search. This made Facebook more engaging for users.

4. Developer friendly API: Developer friendly API has led to an explosive growth in Facebook application. These applications have been successful in increasing time spent by people on Facebook and increased revenue streams. Many community based games/application has seen people spending their largest time spend on Facebook on these games.

5. Lighter mobile version: The light version of Facebook for mobile opened floodgates for status updates on Facebook. Lighter version which requires very less data made Facebook accessible to a huge population developing world that access web only through mobile.

Valuing Facebook

We would use relative valuation approach and past transaction to value Facebook.

In Oct 2007 Microsoft made a $240 million investment taking 1.6% stake. The transaction values Facebook at $15 bn. In March 2008 Li Ka-Shing took 0.8% stake for $120 million, again valuing Facebook for $15 bn In May 2009 Digital Sky Technologies had made a $200 million investment representing a 1.96% stake. Based on this stake the valuation of Facebook stands at a $10.20 billion. If we go by these transactions and adjusting for market condition, valuation table is mentioned below.

Date S&P Index Value Adjusted Value
May-09 919 10.2 17.19
Mar-08 1400 15.0 16.60
Oct-07 1549 15.0 15.00
Average 16.26

Now we look at certain multiple valuations. Since only sales value is available for Facebook we use price/sales multiple.

Revenue 2009($)bn Revenue 

2010E($) bn

Price($) P/S(2009) P/S(2010)
Google 23.7 28.73 592.2 25.0 20.6
Yahoo 4.6 4.6 17.0 3.7 3.7
E-bay 8.6 9.1 30.7 3.6 3.4
Amazon 24 33 175.6 7.3 5.3
Monster 0.9 0.92 24.0 26.7 26.1
Average 13.25 11.82

Source: Reuters

Facebook valuation

Facebook 2009($) 2010E($)
Revenues(bn) 0.7 1.1
Equity(bn) 9.27 13.00

Based on the multiple valuation, Facebook stands at $11.13 bn. Taking an average of both the valuations, we value Facebook at $13.7 bn.

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