Facebook – the social network phenomenon – is proceeding apace with its plans for a stock market listing. How on earth do you value it?
First, a bit of background. Facebook was founded by Mark Zuckerberg with his college roommates in February 2004, less than 10 years ago, and since then has set up around 800 million individual users, the equivalent of around 12% of the world’s population. In October 2007, Microsoft purchased a 1.6% share for $240m, giving an implied value for Facebook of $15billion. By November 2010, transactions carried out privately gave an estimated value of the company as $41 billion. The forthcoming Initial Public Offering – expected to be one of the largest ever – may put a value on the company of as much as $100bn.
This is a big number in anyone’s book. How on earth can it be justified for a company that produced revenues of $3.71 billion in 2011 (albeit up from $1.97 billion a year earlier)? According to Internet World Stats, the number of users broke down like this at the end of last year:
So to put the implied value at flotation into some context, it is the equivalent of $125 for every user and the opportunity, for advertisers, to reach an almost unimaginable breadth of the global population. As important to them is the ability to target, say, all those who like chocolate hob-nobs in the Greater London area, or indeed all those who like chocolate biscuits in the metropolitan Brasilia region. This is the key to Facebook’s financial future but also raises issues of privacy and security of data. After all, people seem willing to reveal far more about themselves digitally than they ever would orally. It is rewriting the rules of advertising and on this basis it is hard to argue that $125 is expensive. Facebook is a unique phenomenon which, rather like Apple with its various products, has ensconced itself in the day-to-day life of a generation in a remarkably short period of time. Rather like the opening up of the Western part of the US in the 1850s, the landscape is changing at an extraordinary pace and not in a way that is altogether good for the present incumbents.
Investors would, however, be well minded to look at the history of MySpace. MySpace was founded in 2003 and acquired by News Corporation in July 2005 for $580 million. From 2005 until early 2008, it was the most visited site in the world and, in July 2006 surpassed Google as the most visited website in the US. It was overtaken by Facebook in April 2008 and, despite several relaunches since, has been in steady decline before sold in June 2011 for just $35 million. Fashion, it seems, is ever a fickle mistress.