If the most popular question to Holway in 2011 was “Are we in another tech bubble?” then, if the last few days are anything to go by, The Question of 2012 will be “Is Facebook worth $100b?” As you can read in The Times today, I was one of the Doubters who called Facebook's $100b into question.
Let’s just put one point aside to begin with. You all know that I believe Facebook has won the social media race. It has already been hugely disruptive and I believe will change radically how we interface with the internet. Indeed, how we interface with everything and everybody. It is simply game-changing. In a few years time, Facebook will be as important as Google is today or Microsoft was in the 1990s.
But I want to concentrate today solely on valuation.
In 2004 Google did its IPO. At the time, Google had revenues of $3.2b and net income of $400m. IPO price was $85 implying a valuation of $23b. Since then, Google’s revenues have soared to $37.9b and net income to $9.74b. Share price is now $598 and a valuation of £190b.
Facebook has revenues of $3.7b and net income of $1b. So using the same PSR as for Google’s IPO, Facebook would be valued at $27b. Using the same P/E puts it at $57b.
Google share price doubled in the first three months and had reached $714 in Dec 07. It has since fallen back to $598. Facebook too will reach maturity at some point. The tech market trades roughly at an average P/E of 12. Google is on a P/E of 19. Let’s assume that Facebook is as successful at growing its revenues over the next 7+ years as Google has been since Aug 04 – ie a 10+ fold increase. That would make Facebook ‘worth’ around $200b in 2019 if the PSR measure held true. Of course Google has boosted its net profit margin from 12% to 26%. Facebook is already on 27%. Do you really think it can boost its margins in the same way? I don’t think so.
So, using these metrics, IF Facebook IPOed at a valuation of $100b, any new investor might double his money in seven years. Or, if it follows the not unusual Google trajectory, you’d double your money in three years and plateau for the next four.
In my Times interview, I said that I thought that all the REAL gains in Facebook had already been made by all those really fortunate people who got awarded or bought shares in the last 5 years. Most will be free to sell some of their shares 6 months after the IPO which, on past record, would be a very sensible thing to do.
Short term, because of all the hype any Facebook IPO, even at $100b, will be successful and will go to a premium. Firstly, every tech fund will need to have it their portfolio. It will be c4% of any of the tech indices. As they are rewarded on their performance relative to a particular tech index, they will be frightened that they might ‘miss out’. Then there is the retail investor. How many of the 845m current Facebook users will say “I want a bit of that..” irrespective of any pricing issues? But buying and holding Facebook for the longer term IF it comes at an exulted $100b valuation will probably be a mediocre investment.
I leave you with one thought. Let’s say back in Aug 04, you’d invested $1000 in both Google and Apple. Your $1000 of Google shares would be worth a tidy $7000 today. But your $1000 of Apple shares would be worth $15,300. Be interesting to see what a similar $1000 investment today will be worth in 2020. Point being that there are probably better homes for your hard earned money.
Note – The article above comes with the usual caveats. It is NOT investment advice – indeed we are not regulated to offer such advice. Caveat emptor.