Facebook IPO – Why It’s Not Worth the Valuation

Facebook is set to IPO on May 18th with a valuation in the neighborhood of $100 billion dollars ($96-$108 billion, based on the high end estimates of $35-$40/share, which I think it will DEFINITELY hit). Depending on whether you’re looking at last year’s revenue or projected revenue for 2012, that’s giving FB a value of 20-25x gross revenue. GROSS.

Can anyone else say bat shit crazy?

Let’s do a little bit of math here. Based on Facebook’s 901,000,000 monthly active users (MAUs) (according to the latest revised S-1 filing) and matched to their revenue of $1,058,000,000 revenue in the first quarter of 2012, Facebook has gross revenue of ~$4.70/yr per MAU (give or take a tad.)

At present, with an estimated world population of 7,013,000,000, there are 2,267,233,742 Internet users on Earth (32.33% of the total population), according to the World Internet Usage Statistics News. That means Facebook has secured 39.74% of all Internet users, and roughly 12.85% of the world’s population (and in reality it’s probably far more than that, since there are certainly far more registered accounts than there are monthly active users. I’d personally bet that there are at least 1.5 billion legit, registered accounts…)

While the total number of Internet users will continue to grow, it’s the first number we want to look at, that 39.74% of all Internet users.

First, let’s just say that it is highly unlikely that Facebook will ever reach 100% of the online population. In all fairness, I think 50% of the online population is probably about where it will plateau, though that could certainly change as the online demographic shifts a generation.

Though the total number of monthly active Facebook users is growing, the rate at which it is growing is slowing significantly. From March 31, 2009 to March 31, 2010, Facebook grew 118.78%. However, from March 2010 to March 2011 it grew just 57.77% (48.63% less growth than 2009-2012), and from March 2011 to March 2012 it grew just 32.5% (56.25% less than 2010-2011.)

At that rate of reduced growth, Facebook will likely plateau in just ~3 years, give or take a little bit. Ruh roh.

So, what does this mean for Facebook’s revenue? Well my friends, the outlook isn’t great from a growth-centric investment perspective.

A smidge over 50% of Facebook users are on mobile devices, which is still un-monetized. On top of that, even if ads are added to the mobile experience, mobile CTRs are roughly 30% lower than desktop CTRs. On the up-side, that is a potential 70% increase in revenue by adding ads to mobile. On the downside though, the mobile ads could trash the experience, causing user abandonment.

So, let’s add it all up. Say Facebook reaches 50% of the online market (we’ll round up to account for the next few years, so call it 1,250,000,000 MAUs), and say they add mobile ads, so a 70% bump on top of the current $4.70/yr per MAU (bringing it to $7.99/yr/MAU.)

If we attempt to factor in the quarterly increase in cost-per-click, and the somewhat improving Facebook average CTR, perhaps Facebook might end up at say $15/yr/MAU in the next 3 years, being generous.

So, if all my math is correct, we’re looking at 1,250,000,000 MAUs X $15/yr/MAU = $18,750,000,000 in gross annual revenue roughly 3 years down the road, where I think it will plateau.

Now, when it comes to valuations, even 5x gross revenue would be quite generous for any company. So, ~3 years down the road, Facebook MIGHT be worth ~$94 billion.

But that’s 3 years down the road, with quite a few very large IFs. If something better doesn’t come along, if ad fatigue doesn’t destroy the market for display and text ads, if Zuck focuses on revenue instead of on just building an awesome product, if Zynga continues to contribute so much cash to the Facebook pot…lots and lots and lots of IFs.

So, all things considered, Facebook is NOT worth the current valuation. Not even close. I think fairly, at best, it’s worth maybe $40-$50 billion. Tops.

As a long-term investment, since there is still some runway left, I think Facebook might hold it’s value fairly well…maybe. But I think it will see a tremendous amount of up and down due to the high level of scrutiny this company is going to get, and that type of volatility can make the staunchest investor a bit anxious.

If you’re looking for a short hold-and-flip, buy early on opening day and sell at the end of the day or early the following week, then I think you’ll make some money due to the interest in this particular IPO.

After a good deal of thought though, I for one will not be investing.

Hell, I feel really bad for Mark, essentially being backed into this corner. I bet the last thing in the world he EVER wanted was to take his baby public. What a nightmare this must be for him.

But, on the upside, at least he’ll continue to be the majority shareholder in terms of voting power, which means that all he really legally HAS to do is serve his (the majority shareholder’s) best interests 🙂

One thought on “Facebook IPO – Why It’s Not Worth the Valuation”

  1. I am laughing my ass off at all of the low IQ indigents who bought this BS companies stock and are losing money. IT IS HI-LAR-IOUS. What a bunch of rejects, they all deserve what they are getting. I wonder how long it will be until Facebook goes the way of MySpace, remember that site? Yeah not long!

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