How to answer the $100bn question

IT’S the $80bn question, or maybe even the $100bn question: just how much is Facebook worth? To find the answer, you would normally try to value the company using traditional multiples – price to sales, price to earnings and so on – and you would quickly find out that the valuations being discussed look ridiculously rich. If you assume it made $3.8bn of revenues in 2011 and take a valuation of $90bn, that would but it on a price-to-sales ratio of 24 times – more than any other tech firm out there (Renren, the so-called Chinese Facebook, is the next closest on 17).

Looking at earnings tells different story. Facebook is said to have pulled in ebitda of around $1.9bn in 2011, giving it remarkable margins of around 50 per cent. That puts it on a market cap-to-adjusted-ebitda ratio of 47 times. Suddenly it no longer looks so expensive when pitted against Linked in (127 times) or Renren (137 times). Of course, these social networks are over-valued too. Comparing it to Google (five times), which has the most compelling business model of any of the internet companies, tells another story.

But while we wouldn’t buy shares in the Facebook IPO, those who claim it will eventually become a corpse in the graveyard of dot com failures are just as wrong as the bulls. Of course, the vast majority of the companies that floated during the initial dot com bubble have fallen by the wayside, but those who survived – Amazon, Google – are huge and growing.

We think Facebook is an Amazon, but it simply isn’t worth $100bn. Not yet.