If Public, What Is Facebook Actually Worth?

If the social-media site goes public, it will have to be as forthcoming as many of its users. The prospect of an IPO has investors salivating, but would buying be a good idea?

Is Facebook finally ready to "friend" the stock market?

Speculation about the vast social-networking website going public is nothing new, and, officially, Facebook doesn't have any plans for an IPO. "But Google said the same thing a month before they filed," says Paul Bard, an analyst with Renaissance Capital, which specializes in IPOs.

What's social networking?

The temptation: Facebook could raise money to fund expansion while employees and early investors realized their riches by unloading shares.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=8cb480a1-596d-45a2-8030-b359f3a2c810,b690488a-e720-4f89-923a-b25e8e8c4e07,5bf31b3a-f53f-45ab-8179-baeaf648a99f,4498a7a3-1309-485e-80c4-8fbcd98422f3,b8f7a4dc-8394-4491-b76d-9c75be23dfcb,56528c13-7aec-db03-9569-44a633528e82,ecd35a6a-fc3e-4713-a5fc-6ea8e0b588a4,bd74e367-e8e0-e4e2-6575-3f68486f48a4,aeeea00d-e11d-44a3-997f-443e88ae746e,03a42fca-8994-482a-ad5e-048e35f63f3f,df003b9e-ff32-4856-b6f1-4c8a6201c9ba,6ecd51da-008e-4311-a602-efc5741680ba,243d9e35-bd1c-407a-9b63-cb803fc2e812", "player.fr": "iv2_en-us_money_article_16x9-Investing-CompanyFocus"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=8cb480a1-596d-45a2-8030-b359f3a2c810,b690488a-e720-4f89-923a-b25e8e8c4e07,5bf31b3a-f53f-45ab-8179-baeaf648a99f,4498a7a3-1309-485e-80c4-8fbcd98422f3,b8f7a4dc-8394-4491-b76d-9c75be23dfcb,56528c13-7aec-db03-9569-44a633528e82,ecd35a6a-fc3e-4713-a5fc-6ea8e0b588a4,bd74e367-e8e0-e4e2-6575-3f68486f48a4,aeeea00d-e11d-44a3-997f-443e88ae746e,03a42fca-8994-482a-ad5e-048e35f63f3f,df003b9e-ff32-4856-b6f1-4c8a6201c9ba,6ecd51da-008e-4311-a602-efc5741680ba,243d9e35-bd1c-407a-9b63-cb803fc2e812;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');The downside: Facebook would have to reveal juicy details about how much money it makes and how it plans to make more. For as often as Facebook founder and CEO Mark Zuckerberg preaches publicly about how greater openness makes us better people, his company is notoriously secretive. Facebook rarely shares information such as revenue and profit margins.

The big question: How much is Facebook really worth, anyway? Valuing the world's biggest social network The anticipation is understandable. This is a website where hundreds of millions of people go daily to trade photos, catch up with friends and family, and share the trivia of their daily lives. (The details get too trivial for some, but hey, no one makes anyone look.) How can it not make money?

Recent leaks published by Reuters put Facebook's 2009 revenue at $800 million. A shop called Next Up Research believes Facebook brings in about $100 million a month. Based on those numbers and projected rapid growth, Next Up estimates the company is worth $11 billion to $12.5 billion. That's around the same estimate you get if you extrapolate from the value of a stake purchased by Digital Sky Technologies in 2009.

But I think those estimates are way off. Facebook is actually worth at least $30 billion. That's a little bigger than eBay (EBAY, news, msgs) and 50% bigger than Yahoo (YHOO, news, msgs), but just a fifth the size of its closest U.S. competitor, Google (GOOG, news, msgs). Here's my reasoning:

The company most like Facebook is a social-networking site called Tencent, listed on the Hong Kong exchange and based in China (where Facebook is banned). "Tencent is the Facebook of China," says portfolio manager Dennis Wassung of Cabot Money Management, which owns Tencent shares.

That's not the only parallel. Tencent has 428 million users, very roughly the same number as Facebook. (Facebook is expected to announce shortly it has topped 500 million users.)

Tencent has a market cap of $32 billion, and that's about what Facebook should be worth.

True, there are big differences between the two companies. Tencent made most of its $1.8 billion in sales last year from subscription fees and gaming, whereas Facebook earns money primarily from advertising. But my reasoning is that however you extract money using the loyalty of a social-networking site's user base as leverage, the amount of money you can extract -- and how fast that will grow -- should be about the same, because the level of loyalty is the same.

Other valuation methods suggest a similar or higher number:

First, consider the value of private shares of Facebook based on transactions carried out by independent brokers and at SharesPost.com, a platform that connects buyers and sellers in the shares of private companies.According to Larry Albukerk, who brokers Facebook shares, substantial volume has changed hands recently in the $50-to-$60 range. SharesPost.com has displayed lots of trades in the same range and even above $70, but it's probably better to exclude those trades as outliers, Albukerk says. Because Facebook has about 480 million shares in the private market, he estimates, its value stands around $30 billion."There are very large, sophisticated institutional investors who are buying at a $30 billion valuation," Albukerk says. (By the way, if you want to buy Facebook stock in the private market, you're out of luck unless you are an accredited investor. This means you have to have at least $1 million in net worth or income of $200,000 to $300,000, depending on whether you are single or married.)

Analysts at Gordon Brothers Asset Advisors, which specializes in putting values on brands, think Facebook could be worth $40 billion to $60 billion. They get to that estimate by averaging the revenue, profit and enterprise value (market cap minus debt) per user at similar online companies such as Google, Yahoo, AOL (AOL, news, msgs) and eBay, and applying the same multiples to the number of Facebook users.

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The big question: How much is Facebook really worth, anyway? Valuing the world's biggest social network The anticipation is understandable. This is a website where hundreds of millions of people go daily to trade photos, catch up with friends and family, and share the trivia of their daily lives. (The details get too trivial for some, but hey, no one makes anyone look.) How can it not make money?

Recent leaks published by Reuters put Facebook's 2009 revenue at $800 million. A shop called Next Up Research believes Facebook brings in about $100 million a month. Based on those numbers and projected rapid growth, Next Up estimates the company is worth $11 billion to $12.5 billion. That's around the same estimate you get if you extrapolate from the value of a stake purchased by Digital Sky Technologies in 2009.

But I think those estimates are way off. Facebook is actually worth at least $30 billion. That's a little bigger than eBay (EBAY, news, msgs) and 50% bigger than Yahoo (YHOO, news, msgs), but just a fifth the size of its closest U.S. competitor, Google (GOOG, news, msgs). Here's my reasoning:

The company most like Facebook is a social-networking site called Tencent, listed on the Hong Kong exchange and based in China (where Facebook is banned). "Tencent is the Facebook of China," says portfolio manager Dennis Wassung of Cabot Money Management, which owns Tencent shares.

That's not the only parallel. Tencent has 428 million users, very roughly the same number as Facebook. (Facebook is expected to announce shortly it has topped 500 million users.)

Tencent has a market cap of $32 billion, and that's about what Facebook should be worth.

True, there are big differences between the two companies. Tencent made most of its $1.8 billion in sales last year from subscription fees and gaming, whereas Facebook earns money primarily from advertising. But my reasoning is that however you extract money using the loyalty of a social-networking site's user base as leverage, the amount of money you can extract -- and how fast that will grow -- should be about the same, because the level of loyalty is the same.

Other valuation methods suggest a similar or higher number:

Continued: Should you chase the IPO? More from MSN Money

 1 | 2 | 3 | next >

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