Only a little more than two dozen U.S. companies have a market cap
that size. Remember, all stock trades are ultimately a matter of
valuation, and valuation is always a matter of perspective.
Perspective almost always needs to be checked, and that is certainly so with the level of hype that is surrounding this IPO.
So is Facebook's underlying business worth owning? To figure this out, I recommend keeping several things in mind.
1. You should be interested in "What's next." Facebook is "What's now."
Everyone already has a Facebook account. How much can it grow from here? That's not a rhetorical question: It's a quantifiable one.
Right now, Facebook's business generates revenue of $3.7 billion and nets 26.9%, or $1 billion. The company grew 77.8% from 2007 to 2008. In the next three years, it grew 185%, 154% and 89%, respectively.
The trend is clear: Facebook's growth is waning. The best comparison here is Google (GOOG), which had four strong years of growth in excess of 30% before growth waned. Facebook is at that point now.
Now, Google, it has to be said, grew into its valuation. It ended
2004 at $192.79 a share and shot up 235% to its current market cap,
which works out to 19.6 times earnings. But it is unlikely that Facebook
will be able to accomplish the same feat.
To be worth $100 billion in market cap, at 19.6 times earnings, Facebook needs to have $5.1 billion in earnings. At its current net earnings margin of 26.9%, that implies top-line revenue of $19.3 billion, which is 421.3% above 2011 levels. This means Facebook has to double revenue and earnings in 2012, then double it again in 2013, then start to have 30% annual growth. If it does that -- which would be an incredible business feat -- it would be worth the top end of its IPO price range.
1. You should be interested in "What's next." Facebook is "What's now."
Everyone already has a Facebook account. How much can it grow from here? That's not a rhetorical question: It's a quantifiable one.
Right now, Facebook's business generates revenue of $3.7 billion and nets 26.9%, or $1 billion. The company grew 77.8% from 2007 to 2008. In the next three years, it grew 185%, 154% and 89%, respectively.
The trend is clear: Facebook's growth is waning. The best comparison here is Google (GOOG), which had four strong years of growth in excess of 30% before growth waned. Facebook is at that point now.
Now, Google, it has to be said, grew into its valuation. It ended
2004 at $192.79 a share and shot up 235% to its current market cap,
which works out to 19.6 times earnings. But it is unlikely that Facebook
will be able to accomplish the same feat.
To be worth $100 billion in market cap, at 19.6 times earnings, Facebook needs to have $5.1 billion in earnings. At its current net earnings margin of 26.9%, that implies top-line revenue of $19.3 billion, which is 421.3% above 2011 levels. This means Facebook has to double revenue and earnings in 2012, then double it again in 2013, then start to have 30% annual growth. If it does that -- which would be an incredible business feat -- it would be worth the top end of its IPO price range.
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