Is Facebook Worth $100 Billion?

It seems clear that Facebook will file its initial public offering sometime early next year. In doing so, it's rumored the social media giant will seek $10 billion for 10% of the company, implying an overall valuation of $100 billion.

As an investor, I can't help but believe that Facebook's IPO will be a notable event. And investors will finally have the opportunity to participate financially in a social network that may, by the time of the offering, eclipse a billion people.

It nevertheless remains to be seen whether a promising yet relatively unprofitable company like Facebook warrants a higher market capitalization than tried-and-true corporate giants such as PepsiCo, McDonald's, and (NAS: AMZN) .

Putting things in perspective
It's easy to believe that Facebook's social ubiquity translates into monster sales figures. In 2010, for example, its closest online competitor, Google (NAS: GOOG) , recorded revenues of nearly $30 billion -- Amazon came in at $34 billion.

Can you guess what Facebook's 2010 revenues were? Try a measly $2 billion. Yep, according to sales alone, Facebook is less than half the size of Foot Locker. Heck, even Cracker Barrel Old Country Store had $400 million more in sales than Facebook did last year -- yes, I did just go there.

Thus, at $100 billion, Facebook would be trading for an astounding 50 times sales -- 23 times sales if the company meets this year's expectations. To give you some context, the latter figure is almost twice LinkedIn's (NYS: LNKD) multiple, three times Groupon's (NAS: GRPN) and Pandora's (NYS: P) multiples, four times Google's, and seven times Apple's (NAS: AAPL) . Not to mention, all of these companies, with the exception of Apple and maybe Google, are trading at multiples most investors view as pricy in their own right!

So where's the catch?
Quite simply, I don't think there is one.

On the surface, it's tempting to attribute Facebook's seemingly absurd $100 billion valuation to the company's purported "low float" IPO strategy. Under this approach, explained in a recent video by two Fools, a company restricts the amount of stock available at its IPO. This drives up the price of each share in the short term by reducing supply. The table below illustrates four tech companies that did this earlier in the year. As you can see, while the low float strategy increases value in the short term, it alone cannot sustain value over a longer time horizon, as evidenced by what's happened to these companies' share prices in the meantime.


% of Company Sold on IPO

Share Price Since IPO (NAS: Z)












Source: The Motley Fool, "Is This IPO Tactic Creating the Next Bubble?"

Unlike these companies, however, I don't believe Facebook needs gimmicks to legitimize its valuation target. In other words, call me crazy, but I think Facebook may very well be worth $100 billion.

Follow my logic for just one second. According to The Wall Street Journal, Facebook will have $4.3 billion of worldwide revenue this year, more than double its 2010 revenues of $2 billion as I mentioned earlier. If it grows revenues by a comparatively measly 60% next year to $7 billion -- and realizes a 50% operating profit similar to Google's -- then it should take home somewhere in the range of $2.3 billion after tax. At $100 billion, that would equate to a price to earnings multiple of 44, well below that of a known-legitimate investment like Amazon, which comes in at 101.

This simple calculation, moreover, ignores the sheer magnitude of Facebook's online ubiquity. According to comScore, Facebook had 790 million unique visitors in October, each of whom spent an average of six hours on the social network. That equates to a cumulative 4.74 billion hours of captive audience in one month. By comparison, Google had 1.1 billion unique visitors, each of whom spent less than four hours on average on the site. LinkedIn, on the other hand, had 92 million unique visitors in October, each of whom spent an average of only 15 minutes on the site, equating to a total of only 23 million hours. Put in these terms, it makes sense that Facebook's valuation would be approaching Google's $186 billion market capitalization and well in excess of LinkedIn's $6.5 billion.

Should you buy in or not?
Getting overly excited about an IPO has left many an investor in dismay once the market's cooler minds prevail. For this reason, you'll want to see Facebook's financial statements, available perhaps as soon as this month, before deciding to jump on the proverbial bandwagon.

In the meantime, I urge you to check out a free report we released yesterday titled "The Motley Fool's Top Stock for 2012." It details a company with massive profit potential that the market has largely ignored. Until now, that is. Given this company's recent performance, it simply won't stay off investors' radars much longer. To get your copy of this free report before this company's share price explodes, click here now.

At the time thisarticle was published Foolish contributor John Maxfield does not have a position in any of the companies mentioned in this article. The Motley Fool owns shares of Apple, PepsiCo, and Google.Motley Fool newsletter serviceshave recommended buying shares of McDonald's, PepsiCo, Google, Apple, Zillow,, and Visa.Motley Fool newsletter serviceshave recommended creating a diagonal call position in PepsiCo and a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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