Facebook’s Valuation – Is Facebook Overvalued?
Looking at Facebook's Valuation More Closely
Is Facebook Overvalued? That is a question that has been asked since before the 2012 Facebook Initial Public Offering (IPO) occurred. Certainly since the Facebook IPO, many have continued to wonder: Is Facebook Overvalued? Take a look at how Facebook arrived at its current sky high valuation and its prospects for increasing in price given its high valuation.
Facebook’s valuation has increased dramatically since the company was founded in June 2004. Prior to the Facebook IPO in May 2012, Facebook’s valuation has been measured by the valuation of investments made in Facebook by private investors and private Facebook stock transactions. Based on the IPO price of $38 per share, the May 2012 Facebook IPO valued Facebook at approximately $104 billion. Once Facebook’s stock is trading publicly on the NASDAQ stock market as stock symbol “FB”, investors around the world will set the valuation of Facebook based on what they perceive the company to be worth. By any measure, the rapid increase in Facebook’s valuation has been astounding.
Is Facebook Overvalued? A Look at Facebook's Valuation Through The Years
Facebook’s valuation through the years since the company’s founding in June 2004.
- The first valuation of the relatively small but fast growing Facebook was in January 2006, when Facebook rejected a $750 million buyout offer from media giant Viacom.
- In September 2006, Yahoo made an initial $1 billion buyout offer for Facebook that was later reduced to $750 million due to a drop in Yahoo's stock price, which was subsequently rejected.
- In October 2007 Microsoft invested in Facebook by buying a 1.6% stake, which gave Facebook a valuation of $15 billion.
- In May 2009 Facebook’s valuation dropped to $10 billion, based on a $200 million investment by Digital Sky Technologies, a Russia based investment group.
- More than a year later, in November 2010, Accel Partners, a venture capital company that was an early investor in Facebook, sold approximately 15% of its stake in Facebook for $517 million, which pegged Facebook’s valuation at $35 billion.
- In December 2010 Facebook’s valuation was approximately $56 billion, based on transactions involving the sale of privately held Facebook stock.
- In January 2011, Facebook reached the $50 billion milestone, when the company raised $500 million from a Russian investment firm and the United States based investment banking firm Goldman Sachs.
- On May 17, 2012, Facebook priced its IPO at $38 per share, giving Facebook a valuation of approximately $106 billion.
The Facebook IPO was initially priced at a range between $28 and $35 per, giving Facebook a valuation between of $77 billion to $96 billion. However, due to high investor demand, the price range for the Facebook IPO was raised to $34 to $38 per share, which translated into a valuation for Facebook between of $93 billion to $104 billion. Once a publicly traded, Facebook's valuation can be calculated by multiplying the 2.74 billion Facebook shares that are outstanding (held by all parties both inside and outside of Facebook) by the price that Facebook’s stock trades at on the public stock exchanges.
Facebook and early investors will offer 421.2 million shares, which will raise up to $16 billion. Of that amount, Facebook will sell 180 million shares and will pocket approximately $6.8 billion. The balance of the 241.2 million shares that are offered for sale via the Facebook IPO will be sold by company insiders and early Facebook investors, which will earn them a cumulative $9.2 billion, The IPO valuation makes Facebook the third-largest initial share sale to occur on a United States stock exchange, with only Visa Inc and General Motors having undertaken larger IPOs. Additional shares that Facebook may sell in the weeks after the IPO, which are considered part of the IPO, would raise the Facebook IPO to the number two spot.
Facebook’s Valuation After Facebook Is Publicly Trading
What will the Facebook’s valuation be after Facebook is a publicly trading company? Keep these Facebook valuation milestones in mind once Facebook is publicly traded, based on the trading price of Facebook's stock FB. The valuations are based on 2.74 billion Facebook shares outstanding, which is subject to change over time.
- At $50 per share, Facebook will have an approximate valuation of $137 billion.
- At $75 per share, Facebook will have an approximate valuation of $205 billion.
- At $100 per share, Facebook will have an approximate valuation of $274 billion.
Facebook’s Valuation Using Traditional Valuation Methods
Facebook’s stock FB is likely to initially trade higher based on hype and future expectations by an investing (and gambling) public that wants to get a piece of what they perceive to be the next big Internet/technology stock. Who wants to miss the next Microsoft, Apple, or Google at its earliest publicly traded days?
If Facebook trades at $50 per share, it will have a price to sales ratio of over 25, based on $4 billion per year of revenue. This is a clear indication regarding how overvalued Facebook’s shares may be in the near term. By comparison, based on 2011 sales, Google’s price to sales ratio is approximately 5 and Apple’s price to sales ratio is approximately 3.6.
Although Facebook earned $1 billion during 2011, at $50 per share, Facebook will have a sky-high price-to-earnings ratio (P/E ratio) of approximately 150. High P/E ratios are tolerated by stock market investors when they invest in fast growing technology companies, since company earnings often catch up with the stock’s price over time. However, Facebook may have trouble growing earnings in the near term, as their advertising model of generating revenue and earnings appears to be faltering. For example, Facebook lost General Motors as an advertising customer and there are indications that Facebook is losing ad revenues, as users switch to using Facebook on smart phones (which is a medium that Facebook does not currently advertise on).
Facebook's founder and Chief Executive Officer, Mark Zuckerberg has stated that the company will focus on finding ways to generate advertising revenues from users using smart phones. However, Facebook has not proven itself to be terribly savvy with advertising and finding ways to book revenues from its massive user base. There is speculation that General Motors cancelled their Facebook ad buys in part because Facebook's advertising sales team was inept and difficult to deal with. Facebook needs to focus on getting a first class advertising sales team in place that uses cutting edge Internet advertising methodologiesand excellent customer care practices to move their advertising sales efforts in the right direction.
Facebook's valuation is at sky high levels based on just about any stock valuation method used to value Facebook. For anyone considering investing in Facebook after the IPO, the old saying caveat emptor "let the buyer beware" applies. While Facebook might maintain its high stock price and valuation for a long time after the Facebook IPO, based on investors forward looking projections of Facebook’s growth and earnings potential, it may take years for Facebook’s valuation to justify the price that it stock sells at.
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