Why is Facebook worth $10bn?

Last month, I made the “way out” prediction that Facebook would be sold for $10bn, probably to Microsoft. A couple of my readers asked for justification, and I basically gave the “this is war” approach – since then, I’ve given it further thought.

In this post, I will attempt to give a business perspective (as if I were running Facebook and trying to justify a value to buyers) on how to get to a $10bn valuation. Remember that Facebook has nearly 40m registered users who share their most intimate details with Facebook (in a structured format), in contrast to Google’s 124m users (which it knows nearly nothing about in general – as many are casual searchers) & Yahoo’s 127m users, many of which Yahoo has some data about – however disparate.

Facebook currently earns around $150m/year in revenue with a reported $30m in profits. On a 1% yield (100 PE), given that it’s a fast growing business, one could argue that it’s worth $3bn, based on it’s existing website advertising & gift revenues.

Now, how do we ramp up the other $7bn? Value add to the acquirer, of course – in my opinion, either Google or MSN (but let’s not discount Yahoo, just yet). Let me just touch on Google/MSN/Yahoo very quickly to put things in perspective.

Google currently earns around $5bn/annum in AdSense (3rd party advertising revenues). As a percentage of total revenues, it’s roughly a third – so one could argue that the AdSense side of the business is worth an estimated $50bn on valuation (as a % of Google’s total market cap). I’m not sure what Google’s market share for online advertising in the contextual space is, but it’s probably something crazy like 50%+, globally (if someone knows, please comment). What makes Google so powerful? It’s large distribution network of publishers, and specifically it’s global advertiser base.

MSN’s Content Ads is similar to Google’s Adwords/Adsense, except that Microsoft have gone after the ability to “boost” bid prices for audiences, based on demographic target, in addition to the contextual nature of the advertising. Google does not offer this functionality, as such, just yet.

Yahoo has a similar system to Google, with their Yahoo! Publisher Network. So, in short, Yahoo, Google & MSN have advertisers, and primarily contextual based advertising systems (contextual means that the advertising served to readers is based upon what they’re reading, not who they are – except for MSN).

Facebook has the data around users that MSN, specifically, needs to improve the ability for advertisers to target reader, regardless of which web pages they are reading. What is this worth to them? If we assume that if Facebook goes the direct route, and competes with Google/MSN/Yahoo for the contextual market, what would they have to do?:

1. Build a contextual advertising system (or partner)
2. Recruit web publishers & advertisers (or acquire someone like AdBrite, etc)
3. Create a more targeted version of AdSense/Content Ads/YPN – and serve more relevant advertising and compete with the big 3.

If they executed the above, would it be fair to say, that within 3 years, it is possible to assume that Facebook could acquire a 10% market share of the contextual advertising market. The question is, what is that market worth? Well, from the earlier points above, probably an estimated $10bn in revenues, and with revenue multiples of 10x, and if we’re probably looking at Facebook generating at least $1bn from Contextual Advertising, then the future value (looking forward 3 years), would be about $13bn ($10bn + $3bn of on site revenue).

Yes, ladies and gentlemen – I’m saying that Facebook probably has a net present value of $10bn, based upon the fact that it could become a credible competitor to Google, Yahoo & MSN in the contextual advertising market. In fact, it’s probably worth more if the titans got into a bidding war for it. Remember, if they get acquired, specifically by MSN, the 3 year period to build a user targeted advertising system would be significantly shorter and would put pressure on Google Adsense & Yahoo Publisher Network with respect to product offering to web publishers.

My $10bn Facebook valuation is based upon 2 things – A) Future value still to be unlocked & B) Strategic value to MSN/Google/Yahoo

Time will tell…

Update (Sep 2):  Mark Cuban released some thoughts on this topic – I hadn’t thought of the fact that FaceBook could license out the data – mainly due to the privacy issues of ensuring that the 3rd party companies do not subvert them in any way, however, if Facebook did walk this path – potentially $10bn is the floor valuation…

Comments

  1. Interesting post.

    Now, how much is facebook worth to the average user?

    What value can we, the users, derive (in monetary terms)?

  2. Interesting post.

    Now, how much is facebook worth to the average user?

    What value can we, the users, derive (in monetary terms)?

    1. Michael says:

      That makes no sense. What value can you, as a user, derive (in monetary terms from your TV? That didn't stop you from paying a grand for it did it?

  3. Kevin says:

    Very interesting valuation and reasoning Vinny. It’s even more interesting if you start including the media houses in the equation. Don’t forget that Rupert Murdoch trounced everyone and acquired MySpace and almost immediately made all the money back by selling the advertising contract to Google.

    An interesting post by John at GotAds? (http://gotads.blogspot.com/2007/08/facebook-apps-doing-1000-day-with.html) shows that some people are raking in the cash from their Apps alone. If the purchaser of Facebook decided they also wanted a piece of this pie, I think your $10bn might even be slightly underestimated :-)

  4. Excellent posts Vinnie, thank you for your continuing insight into the monster trend that is Facebook.

    As a recent convert, I’d like to challenge something you referred to in your earlier post regarding corporates banning Facebook: I’m soley using Facebook as a business networking tool as most of my friends are not IT geeks and are of the generation that barely know how to use the internet. They are not on Facebook and are unlikely to ever use it, particularly those in industries where they are not online very often.

    My clients, media colleagues, work colleagues and people like you who I learn from ARE, however, on Facebook, and I am far more interested in mining your brains and keeping in touch with industry and professional groups in my areas of professional interest, than I am about personal hobbies, which I do in my own time.

    In fact, one of the greatest benefits to me is keeping in more regular touch with colleagues at our Cape Town HQ, some of whom I don’t know very well as I only see them for a few hours every couple of months.

    So for my purposes, it’s absolutely the best business networking tool I’ve ever come across – not least because it also makes it fun and interactive – that feeds my creative side as well.

    Facebook addict!

    Louise Marsland, Bizcommunity.com

  5. Yasser says:

    Hmm… Wow,
    now it makes much more sense vinny,
    i initially thought the $10bn price tag was a bit too much, but after taking all those facts into consideration, now i can say, Facebook is worth it!

  6. Thanks Louise!

    I don’t disagree that it’s a business tool, but all I’m saying is that it’s primarily a social tool, and business usage is an application thereof.

    I use Facebook to recruit people – and it’s working quite well, actually!

    V

  7. Kevin says:

    Very interesting valuation and reasoning Vinny. It’s even more interesting if you start including the media houses in the equation. Don’t forget that Rupert Murdoch trounced everyone and acquired MySpace and almost immediately made all the money back by selling the advertising contract to Google.

    An interesting post by John at GotAds? (http://gotads.blogspot.com/2007/08/facebook-app…) shows that some people are raking in the cash from their Apps alone. If the purchaser of Facebook decided they also wanted a piece of this pie, I think your $10bn might even be slightly underestimated :-)

  8. Excellent posts Vinnie, thank you for your continuing insight into the monster trend that is Facebook.

    As a recent convert, I’d like to challenge something you referred to in your earlier post regarding corporates banning Facebook: I’m soley using Facebook as a business networking tool as most of my friends are not IT geeks and are of the generation that barely know how to use the internet. They are not on Facebook and are unlikely to ever use it, particularly those in industries where they are not online very often.

    My clients, media colleagues, work colleagues and people like you who I learn from ARE, however, on Facebook, and I am far more interested in mining your brains and keeping in touch with industry and professional groups in my areas of professional interest, than I am about personal hobbies, which I do in my own time.

    In fact, one of the greatest benefits to me is keeping in more regular touch with colleagues at our Cape Town HQ, some of whom I don’t know very well as I only see them for a few hours every couple of months.

    So for my purposes, it’s absolutely the best business networking tool I’ve ever come across – not least because it also makes it fun and interactive – that feeds my creative side as well.

    Facebook addict!

    Louise Marsland, Bizcommunity.com

  9. Yasser says:

    Hmm… Wow,
    now it makes much more sense vinny,
    i initially thought the $10bn price tag was a bit too much, but after taking all those facts into consideration, now i can say, Facebook is worth it!

  10. Searchquant says:

    Vinny, I love you but you’re way off on this one IMO. You say 1/3 of G’s revs come from AdSense, so 1/3 of G’s valuation is attributable to it, but you miss one HUGE thing here: Google has 70-80% TAC (traffic acquisition costs) on AdSense, and zero TAC on the rest of their business. So multiply the % of total revs AdSense brings to Google by 20-30% (post-TAC revs) to get to a more realistic valuation model for the contextual advertising sector.

    If Google’s 50% of the market is worth $12.5B and not the $50B you state, Facebook’s worth a whole lot less.

    Also (and I appeal to your love of data on this one), don’t we all know in our heart of hearts that Facebook – and most contextual traffic for that matter – doesn’t convert and is only temporarily over-valued?

    I see a wave of advertisers getting smart thanks to Omniture, Google Analytics, Coremetrics et al, and the horror in their eyes as they realize how little contextual marketing has done for them.

    That

  11. Hey Chris

    Your comment got truncated somehow – email me the balance, and I’ll finish your comment.

    My thoughts:

    1. Agreed on the TAC. I’m using illustrative figures, but I till believe that a revenue multiple of 10x is probably fine.

    2. You’re talking about Facebook ads ON Facebook – I’m speaking a different language here – I’m talking about off site – 3rd parties.

    3. My focus on this post is the value TO MSN/Yahoo/Google relating to owning the consumer data that Facebook has built up, and therefore the valuation has to be in line with what Facebook could POTENTIALLY earn from the contextual marketplace if it had a go it alone strategy.

    I would argue that it would be relatively easy for Facebook to build a $1bn revenue business within 3 years, on the back of it’s growing consumer data. Surely, that’s worth $10bn in today’s digital arms race?

  12. Thanks Louise!

    I don’t disagree that it’s a business tool, but all I’m saying is that it’s primarily a social tool, and business usage is an application thereof.

    I use Facebook to recruit people – and it’s working quite well, actually!

    V

  13. Searchquant says:

    Vinny, I love you but you’re way off on this one IMO. You say 1/3 of G’s revs come from AdSense, so 1/3 of G’s valuation is attributable to it, but you miss one HUGE thing here: Google has 70-80% TAC (traffic acquisition costs) on AdSense, and zero TAC on the rest of their business. So multiply the % of total revs AdSense brings to Google by 20-30% (post-TAC revs) to get to a more realistic valuation model for the contextual advertising sector.

    If Google’s 50% of the market is worth $12.5B and not the $50B you state, Facebook’s worth a whole lot less.

    Also (and I appeal to your love of data on this one), don’t we all know in our heart of hearts that Facebook – and most contextual traffic for that matter – doesn’t convert and is only temporarily over-valued?

    I see a wave of advertisers getting smart thanks to Omniture, Google Analytics, Coremetrics et al, and the horror in their eyes as they realize how little contextual marketing has done for them.

    That

  14. Hey Chris

    Your comment got truncated somehow – email me the balance, and I’ll finish your comment.

    My thoughts:

    1. Agreed on the TAC. I’m using illustrative figures, but I till believe that a revenue multiple of 10x is probably fine.

    2. You’re talking about Facebook ads ON Facebook – I’m speaking a different language here – I’m talking about off site – 3rd parties.

    3. My focus on this post is the value TO MSN/Yahoo/Google relating to owning the consumer data that Facebook has built up, and therefore the valuation has to be in line with what Facebook could POTENTIALLY earn from the contextual marketplace if it had a go it alone strategy.

    I would argue that it would be relatively easy for Facebook to build a $1bn revenue business within 3 years, on the back of it’s growing consumer data. Surely, that’s worth $10bn in today’s digital arms race?

  15. Rajan says:

    In the words of Warren Buffett, you cannot truly value a company, unless it has predictable earnings, for example Coca Cola pretty much grows at about 8% a year. A company that does not have preditable earnings has a value anywhere between a very small figure and a very large figure – too wide a range. As an investor, one cannot predict with a fair degree of certainty what the value of facebook is, so as to earn an appropriate rate of return. This does not mean that it is not a good company with great prospects, all it means is that the company cannot be valued from an investment perspective to realise an above market rate of return. Hence to invest in or to buy facebook would be a speculative venture. Why do tech companies insist on purchasing other tech companies? Cash rich tech companies should look at purchasing less capital intensive, but high rate of return companies like candy companies, etc. The truth is companies seldom last a 100 years, it is a better proposition to view companies as cash rich investment vehicles where cash is free to be allocated to a business with the best rate of return, rather than to see a as a sector based institution.

  16. Rajan says:

    In the words of Warren Buffett, you cannot truly value a company, unless it has predictable earnings, for example Coca Cola pretty much grows at about 8% a year. A company that does not have preditable earnings has a value anywhere between a very small figure and a very large figure – too wide a range. As an investor, one cannot predict with a fair degree of certainty what the value of facebook is, so as to earn an appropriate rate of return. This does not mean that it is not a good company with great prospects, all it means is that the company cannot be valued from an investment perspective to realise an above market rate of return. Hence to invest in or to buy facebook would be a speculative venture. Why do tech companies insist on purchasing other tech companies? Cash rich tech companies should look at purchasing less capital intensive, but high rate of return companies like candy companies, etc. The truth is companies seldom last a 100 years, it is a better proposition to view companies as cash rich investment vehicles where cash is free to be allocated to a business with the best rate of return, rather than to see a as a sector based institution.

  17. Richard says:

    Rajan, sounds like you’ve missed out on the internet like Warren (dare I say). I think you have a little knowledge about this and you’re applying it with a brush that’s too broad.

    “You cannot truly value a company, unless…” I’d change that to: You cannot truly value a company, period.

    As for buying candy companies – I guess you could test that theory when you’re running a tech compnay. My guess ; shareholders will crucify you.

    Because of the rapid growth in this space it doesn’t make sense to talk about valuation in terms of rate of return. It makes sense to talk about what other companies will pay for it – which (we expect) correlates to the value it brings them. If you were to value facebook at it’s current $30m in profit off earnings of #150 you’ll get maybe $500m at a push, but I think you’d pay a lot more for it than that, Microsoft would, Google would, Yahoo would, I know I would. Therefore your valuation would be very wrong.

    But you’re right. We are just speculating :)

  18. Richard says:

    Rajan, sounds like you’ve missed out on the internet like Warren (dare I say). I think you have a little knowledge about this and you’re applying it with a brush that’s too broad.

    “You cannot truly value a company, unless…” I’d change that to: You cannot truly value a company, period.

    As for buying candy companies – I guess you could test that theory when you’re running a tech compnay. My guess ; shareholders will crucify you.

    Because of the rapid growth in this space it doesn’t make sense to talk about valuation in terms of rate of return. It makes sense to talk about what other companies will pay for it – which (we expect) correlates to the value it brings them. If you were to value facebook at it’s current $30m in profit off earnings of #150 you’ll get maybe $500m at a push, but I think you’d pay a lot more for it than that, Microsoft would, Google would, Yahoo would, I know I would. Therefore your valuation would be very wrong.

    But you’re right. We are just speculating :)

  19. [...] my website!Not too long ago, Vinny Lingham wrote an interesting article on his predication that Facebook is worth 10$bn. In his interesting article, he compares Facebook to Google, MSN and such companies to give us all [...]

  20. Zoey Malotana says:

    sir

    I am not in anyway a business minded individual, infact far from it. but I was fascinated by your article and did not find your estimate far removed considering how Facebook has changed and developed just in the past 3months alone.

    what scares me is the part where you state that they know our most intimate details and they have it in structured format. This thought has caused me much apprehension for if you are a user you quickly learn that other than the odd discarded messages nothing on facebook is deleted. Its just hidden. So all that information is stored away somewhere for future statistical use, research, ect.

    I don’t know who is behind facebook but I feel their greatest asset is that they know exactly what we want, when we want it the most and provide it. There is no better supply and demand relationship. And soon, 10b might actually be an underestimation.

    Like I said this is my opinion… no business research or whatever.

  21. Zoey Malotana says:

    sir

    I am not in anyway a business minded individual, infact far from it. but I was fascinated by your article and did not find your estimate far removed considering how Facebook has changed and developed just in the past 3months alone.

    what scares me is the part where you state that they know our most intimate details and they have it in structured format. This thought has caused me much apprehension for if you are a user you quickly learn that other than the odd discarded messages nothing on facebook is deleted. Its just hidden. So all that information is stored away somewhere for future statistical use, research, ect.

    I don’t know who is behind facebook but I feel their greatest asset is that they know exactly what we want, when we want it the most and provide it. There is no better supply and demand relationship. And soon, 10b might actually be an underestimation.

    Like I said this is my opinion… no business research or whatever.

  22. Gordon Choi says:

    Surely, I agree the organized user base is the biggest single asset of Facebook. Its power will only be unleashed, when it integrates into an advanced contextual advertising platform provided by one of the top search engines.

    Whether it is Google, Yahoo or Microsoft, whoever gets Facebook will become the future king in contextual advertising.

  23. Gordon Choi says:

    Surely, I agree the organized user base is the biggest single asset of Facebook. Its power will only be unleashed, when it integrates into an advanced contextual advertising platform provided by one of the top search engines.

    Whether it is Google, Yahoo or Microsoft, whoever gets Facebook will become the future king in contextual advertising.

  24. gordon, that’already happening with the announcement this week of google now being able to reach in and search facebook profiles. a move which holds enormous opportunity for both the companies contextual marketing revenue potential – but at what cost? : blogged this about it just today from heathrow http://blog.forgebusiness.com/187/s-acebook-a-predators-nirvana/

    vinny? what’s your take?
    jon

  25. gordon, that’already happening with the announcement this week of google now being able to reach in and search facebook profiles. a move which holds enormous opportunity for both the companies contextual marketing revenue potential – but at what cost? : blogged this about it just today from heathrow http://blog.forgebusiness.com/187/s-acebook-a-p

    vinny? what’s your take?
    jon

  26. [...] is certainly worth 10 billion dollar according to this analysis on Vinny Lingham’s blog, especially when its large and organized user base is integrated with [...]

  27. [...] do not currently justify the level of spend at present. I’ve written extensively on what the value of social networks such as Facebook is, and it specifically mentions that the value is in the data and the use thereof [...]

  28. [...] I wrote about my justification on why Facebook was worth $10bn a month ago, I had a lot of skeptics who thought that I was smoking some really good stuff. In [...]

  29. It looks like I was right after all :-)

  30. It looks like I was right after all :-)

  31. Get Serious! says:

    BUBBLE 2.0. All we need to say! The CEO’s ego will get the best of him and those involved. Take the money and run, remember Friendster. Facebook will never be a Google, Yahoo, or MSN. Remember what happened to Yahoo when their business model was based pretty much on advertising alone. They fired Tim Koogle and changed their business model. They have several revenue streams but their stock is still down 60% since 2000 and the valuation is finally realistic. Maybe? People thought Facebook was stupid to not accept a billion from Yahoo. Now a year later, people are saying it is worth $10-$15 billion. Did that much really change in the past year to justify this speculation. Friendster was a fad. These are pretty much college kids we are talking about. What are they really worth per user? After they get into the “real world” they will not be spending hours a day on Facebook. If someone pays over $2 billion for them, it will be seen as the same mistake Yahoo did with Broadcast.com Mark Cuban 1.0. Zuckerman 2.0???? Or will his lack of experience get the best of him? Seriosly, Vinny. Just do simple P/E Ratio and simple Wall Street Math. It will take 500 years to make sense at a $10 -$15 million valuation. Common, don’t feed the media hype! Be a responsible media journalist but you probably have some back end alterior motive to righting this article.

  32. Get Serious! says:

    BUBBLE 2.0. All we need to say! The CEO’s ego will get the best of him and those involved. Take the money and run, remember Friendster. Facebook will never be a Google, Yahoo, or MSN. Remember what happened to Yahoo when their business model was based pretty much on advertising alone. They fired Tim Koogle and changed their business model. They have several revenue streams but their stock is still down 60% since 2000 and the valuation is finally realistic. Maybe? People thought Facebook was stupid to not accept a billion from Yahoo. Now a year later, people are saying it is worth $10-$15 billion. Did that much really change in the past year to justify this speculation. Friendster was a fad. These are pretty much college kids we are talking about. What are they really worth per user? After they get into the “real world” they will not be spending hours a day on Facebook. If someone pays over $2 billion for them, it will be seen as the same mistake Yahoo did with Broadcast.com Mark Cuban 1.0. Zuckerman 2.0???? Or will his lack of experience get the best of him? Seriosly, Vinny. Just do simple P/E Ratio and simple Wall Street Math. It will take 500 years to make sense at a $10 -$15 million valuation. Common, don’t feed the media hype! Be a responsible media journalist but you probably have some back end alterior motive to righting this article.

  33. Get Serious:

    Firstly, I can only wish I had Facebook stock! The truth is that I don’t.

    Facebook’s 10bn valuation is based on a PE of 300 – as they are making $30m in profits this year – not bad for a 3 year old company.

    Let’s work out some projections going forward if they continued to grow at a 100%/year – which is what Google achieved for the first few years after launching Adwords. Facebook have enough impressions and off a small base, can definitely grow quickly:

    2007 – $30m
    2008 – $60m
    2009 – $120m
    2010 – $240m

    Basically, in 4 years, if they can achieve moderate growth in their user base, but improve monetization – getting to a $240m/annum profit base – at a PE of 40 – which is pretty common – the company can easily be valued at $10bn – it’s not a bubble – there are revenues, discounted cash flows, and a steep growth curve ahead. The reality is that Facebook will probably grow at more than 100%/year.

    Remember Metcalfe’s law, and you will understand why their network is so valuable!

  34. Get Serious:

    Firstly, I can only wish I had Facebook stock! The truth is that I don’t.

    Facebook’s 10bn valuation is based on a PE of 300 – as they are making $30m in profits this year – not bad for a 3 year old company.

    Let’s work out some projections going forward if they continued to grow at a 100%/year – which is what Google achieved for the first few years after launching Adwords. Facebook have enough impressions and off a small base, can definitely grow quickly:

    2007 – $30m
    2008 – $60m
    2009 – $120m
    2010 – $240m

    Basically, in 4 years, if they can achieve moderate growth in their user base, but improve monetization – getting to a $240m/annum profit base – at a PE of 40 – which is pretty common – the company can easily be valued at $10bn – it’s not a bubble – there are revenues, discounted cash flows, and a steep growth curve ahead. The reality is that Facebook will probably grow at more than 100%/year.

    Remember Metcalfe’s law, and you will understand why their network is so valuable!

  35. [...] 25, 2007 by Vinny Lingham Powered by Gregarious (21)Ok – my bad. I said $10bn – I won’t take it personally if you unsubscribe from my blog. The story is covered by [...]

  36. [...] many scarcely could believe that FaceBook could possibly be valued at $15 billion, except possibly Vinny Lingham, who came close in August 2007 when he conservatively valued FaceBook at $10 billion. So Lingham was off by $5 [...]

  37. [...] December 3, 2007 by Vinny Lingham Powered by Gregarious (21)Ok – so the $15bn valuation is holding up, according to Kara Swisher. Granted, when it comes to Chinese billionaires, and large software companies that put $240m in for less than 2%, it’s arguable that the valuations are not realistic. Heck, I think I was even the first person to predict that they would get a $10bn valuation. [...]

  38. Thank youu very muchh….ssv

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