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May 3, 2011

What is The Real value of Facebook

The Wall Street Journal reported the social-networking giant is on track to make $2 billion this year in profit before interest, taxes, depreciation and amortization.
Using published estimates from market-research firm eMarketer Inc., the paper said Facebook is likely to rack up $4.05 billion in ad revenue this year, more than double 2010's take of $1.86 billion.
Whenever Facebook does go public, it would be subject to the basic laws of valuation -- once people know your real numbers, they value your company like they value other, similar companies. If you know how many times earnings -- the multiple -- the market pays for a few comparable companies we've featured below, it's not hard to do the rest.
Trouble is, the numbers for six selected companies point all over the place, implying Facebook valuations anywhere from less than $20 billion to $107 billion. But all of the comparables point to a lower number than the expert the Journal quoted on Facebook's value.
The bottom line: Of these six, really only makes a convincing case for the kinds of public trading price Facebook's fans think are reasonable. And there may be good reason for published reports that existing Facebook holders had trouble trying recently to sell shares at a $70 billion valuation.
Company: Open Table
What it does: Online restaurant reservations
Valuation Price-to-EBITDA*: 53.7
Facebook's value at that multiple: $107.4 billion
A consumer-facing Web application with a big upside from mobile, just like Facebook. But a lot smaller. It's easy to find analysts who think OpenTable is wildly overvalued, and short sellers have bet unusually heavily against it. But it's a good proxy for what might happen if IPO investors go nuts for Facebook.
Company: Google
What it does: Search engine
Valuation Price-to-EBITDA*: 9
Facebook's value at that multiple: $18 billion
The gold standard for recent Web startups that are going all the way to the top. It grew faster than Facebook early on, and provides one way of thinking about how a post-IPO Facebook might mature and see valuation metrics cool as the company grows. In other words, don't buy Facebook at 50 times EBITDA unless you think it will grow so fast it shares will still rise even as its multiple arcs downward.
Company: Priceline
What it does: Online travel
Valuation Price-to-EBITDA*: 22
Facebook's value at that multiple: $36 billion
A benchmark for well-run, blue-chip Internet companies and its valuation still suggests Facebook isn't as valuable as fanboys think. Facebook is growing fast, bolstering the case for a higher multiple, but Priceline's 65% annual profit growth the last five years is nothing to sneeze at, either.
Company: Netflix
What it does: Movie subscriptions
Valuation Price-to-EBITDA*: 27
Facebook's value at that multiple: $54 billion
One of the most controversial Net stocks ever since its 2002 IPO, and twice as expensive as the market even after adjusting for its high growth rate. And its multiple still doesn't get Facebook anywhere near estimated IPO valuations of $70 billion to $100 billion or more.
Company: Apple
What it does: Computers, smartphones
Valuation Price-to-EBITDA*: 10
Facebook's value at that multiple: $20 billion
Speaking of fanboys, Apple's relatively modest multiples despite terrific performance and ever-glowing media notices should give Facebook's bankers -- and eventual IPO buyers -- some pause. It's not a Web company, but its 55% annual profit growth, worshipful press, and leadership in mobile make it a lot like Facebook. Sooner or later, Facebook will have to "settle" for Apple-like growth.
What it does: Cloud computing
Valuation Price-to-EBITDA*: 52
Facebook's value at that multiple: $104 billion
Possibly the most encouraging comparable for Facebook, it suggests a $100 billion valuation is plausible. Why? Because the maker of customer-relationship management software that runs over the Internet has kept up its sky-high multiple for nearly seven years now since its 2004 IPO.

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