Apr 12, 2012

Did you press “like” button for the Facebook IPO?



There's been widespread discussion regarding valuation of the most successful social network. With IPO knocking on the door speculations are growing. Reuters Braking Views has invented value calculator which helps overall investor to manipulate Facebook value driving forces and the valuation range considering certain assumptions. One clear advantage of the model is the ability to manipulate the inputs which gives you option for dynamic valuation. 

Back to valuation the Reuters authors have set input numbers similar to the Google pre IPO period returned 7 years back. That is impressive 70% per year revenue growth for the next two years, followed by moderate 10% for the 2018-2021 period, EBIT margins falling from 40% in acceleration period to 30% in post acceleration period and 15% discount rate.
Facebook Valuation considering 70% revenue growth rate
Facebook Valuation considering 70% revenue growth rate
With those assumptions the output data shows $75 billion valuation of which $28 billion from pre 2021 and $46 billion from post 2021. However the number $75B means nothing if not compared. For non-public company comparison may be done by observing deals of the private investors. As to January 2012 the company value based on the private secondary markets is $83.5B. After filling for the IPO on 2nd of Feb valuation jumped to $94B and then fell. All that numbers compared to the value of $75B based on the optimistic growth assumptions we’ve got an overvaluation. When comparing mentioned values one should consider the sensitivity of the Reuters model to changes in all input data especially in discount rate. If, for example, Facebook revenue growth rate falls from 70% to 60% (still considerable number) in the growth period the valuation drops to $58B!
Facebook Valuation considering 70% revenue growth rate
Facebook Valuation considering 70% revenue growth rate
On the other hand recent FB corporate activity continues to “poke” investors. By taking public attention the IPO interest is constantly growing. Move like FB buying Instagram, photo sharing application, could be considered as such. Probably the social giant won’t stop with that purchase only. According to some analysts Mark Zuckerberg is trying to improve company's profitability. Interesting question is how Instagram functions would be monetized to bring value to Facebook?

The IPO is coming and it would be good for investors to make objective judgment before attending the big party. Weather Facebook is going to trade as 100 $billion company or less it is about to be seen soon and is clear that this May is going to be interesting. 



Reuters calculator could be found here.

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