Will 2011 be the year Facebook's value gets real?
-- The authors are Reuters Breakingviews columnists. The -- The authors are Reuters Breakingviews columnists. The opinions expressed are their own --
By Robert Cyran and Rob Cox
NEW YORK, Dec 28 (Reuters Breakingviews) - Facebook may at last become a real, rather than virtual, money spinner in 2011. The social network doesn't need capital to grow, but expectations from backers and employees for an IPO are too high for founder Mark Zuckerberg to ignore. There's just one challenge: trading in Facebook's unlisted shares values the website at more than $40 billion. Getting to that number requires some astonishing growth assumptions.
That's not to say it's impossible for Facebook to attain a public market value at least as big as its current implied worth. Facebook is both valuable and becoming more so. It has more than 500 million users and it's adding thousands by the minute. But rarely has a private company attracted such a large
-- and relatively liquid -- financial status as Facebook. -- and relatively liquid -- financial status as Facebook.
So how can the firm founded in a Harvard dorm room fill out its $40 billion-plus britches? Facebook should double revenue to $2 billion this year. If its margins are in line with Yahoo's (YHOO.O), that would suggest it makes about $300 million in profit. Thus its implicit valuation is somewhere around a stratospheric 133 times earnings.
But there's another way to look at it. Using a standard earnings growth model, Facebook could warrant its private-market value if it can grow its bottom line more than 25 percentage points faster than the average company for the next decade. Few firms ever manage to sustain this type of performance. Microsoft (MSFT.O) and Google (GOOG.O) may be among the few that managed something like it in their heydays.
Put another way, despite consumers spending perhaps a third of their media time online, the Internet accounts for less than 15 percent of all advertising dollars. Simply closing this gap would amount to $50 billion in additional ad revenue, according to Morgan Stanley. If Facebook could nab half of that, at Yahoo-style profit margins it would earn some $4 billion in annual profit -- possibly enough to justify its valuation.
It's still a very long shot. Even though Facebook's web audience comes second only to Google's, extracting more revenue from users could be problematic and set off privacy concerns. Users may simply grow fickle, as they did over at MySpace. And advertisers may never become as comfortable advertising online, particularly in the racier medium of social networks, as they are on, say, network broadcasters or billboards.
So although a Facebook IPO is something that may become real in the coming year, it's harder to tell whether the same will be true of its heady valuation.
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CONTEXT NEWS
-- Shares of Facebook have surged in private market trading, rising to as much as $56 billion on private exchange SharesPost, according to the Wall Street Journal. Facebook is now trading at an implied valuation of $42.4 billion, the New York Times Dealbook reported, also citing SharesPost.
-- Separately, the Times said the Securities and Exchange Commission has sent information requests to several participants involved in trading shares of non-public companies including Facebook, Twitter, Zynga and LinkedIn.
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(Editing by Rob Cox and Martin Langfield)
((robert.cyran@thomsonreuters.com; rob.cox@thomsonreuters.com)) Keywords: BREAKINGVIEWS FACEBOOK/
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