When Play Valuations Become Real or What is Facebook Really Worth?

Mark Zuckerberg and Facebook valuationIn what is a very generous gift, Facebook founder Mark Zuckerberg is giving a “$100 Million” donation to the Newark School system to help improve it. However, I put that “$100 Million” in quotes because the donation is in stock so that number is based on Facebook’s current valuation.

The $100 Million number is being reported throughout all the tech and financial media, and Zuckerberg even was on the Oprah Winfrey show to discuss the gift. The problem with this is that the valuation of Facebook is now commonly being discussed as $33 Billion, while that’s not really real yet.

David Heinemeier Hansson of 37Signals posted an interesting set of thoughts that argues that Facebook is definitely not worth $33 Billion today. His primary arguments are that:

  • Facebook’s valuation number is based on recent minority investments which “aren’t real”. The investments themselves are real, but what Hansson is arguing that the valuation those minority investors are paying is extremely high simply because they are star-struck and want to own part of Facebook. If the company was on an open market with lots of trading, the stock would not be selling for anything near that much at mass quantities.
  • Facebook is not profitable yet. They just raised $120 Million in a Series E round which means they aren’t profiting much if anything from their rumored $1 Billion in revenue this year. Hansson then gives them the benefit of the doubt they could earn a 20% margin which would end up giving them a P/E ratio of 165 and valuing Facebook at 7.5 times Google. I have to agree with Hansson here, that is just nuttiness.
  • Hansson’s last main point is that after 7 years of being in business, Facebook is not outrageously profitable. He wonders how much more time they need to crack the code to unlock gobs of revenue and profits from their 500M+ users.

I agree strongly with Hansson’s first two points. I think the jury is still out on the last point about Facebook being in business for 7 years and implying that means they never will figure out how to make a lot of money from their large base of users. The reason I’d argue against that point are that:

  1. Facebook has resisted being aggressive about extracting revenue from their users for much longer than most companies could have. First, they had the option to do this based on their amazing growth which allowed them to keep raising money at increasingly impressive valuations. Second, Zuckerberg has little interest in the more traditional ways of making money like display advertising so he fought against it internally.
  2. As a private company, Facebook has not HAD to show huge profits and revenue growth to please Wall Street. They’ve been able to focus on their product and user growth, so that’s what they’ve done. If they were a public company, I’m sure they’d be more aggressive in driving up revenue and profits.
  3. While Facebook is 7 years old, they still are innovating their product very rapidly and leading the entire web through a major change to being more social. Many people feel that this will change search, or create new kinds of search, and new ways to generate revenue. Facebook holds a lot of power controlling almost everyone’s social graph, and there are a number of ways they could be making way more money both now and in the future.

Even with a bright future, it’s clear right now that a $33 Billion valuation is too high for the amount of revenue and profits being created by Facebook today. Therefore, Mark’s $100 Million gift is not actually worth $100 Million today, but I’m not sure yet that I’d rule out that it won’t be worth that much in a couple of years.

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  • Dave B

    Wasn’t the “gift” just a rebuttal the movie anyway?

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    I think it’s hear for the duration as a major player.

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