It’s just after one o’ clock on a cold, rainy Tuesday afternoon in north central Illinois, and in the other room I can hear the sound of Thumbellina entertaining my three-year-old daughter. In front of me, I have my web browser opened to Facebook as I chat with a friend using Facebook’s built-in instant messaging feature. According to their company information page more than 450 million people world-wide will log on to this social media giant at some time today.

It’s difficult to find the right word to describe the influence and global impact that Facebook has had in the online world. They’ve grown to become a household name in the truest sense of the word in only 8 years. When I graduated from high school in 2003, Facebook wouldn’t be dreamed up for another year, and now, it’s the centerpiece of untold millions of users’ daily online experiences.

Consider the following examples that illustrate the how profoundly Facebook has dominated every demographic around the globe.

  • A few months ago, a 16-year-old German girl posted an invitation in which she failed to identify the invite as private restricting it to those on her friend’s list. When she arrived at her party, more than 15,000 Facebook users had accepted her invitation and and more than 1,600 showed up. Police were called and 100 uniforms were dispatched to keep order at the event .
  • Earlier this year, a Taiwain woman committed suicide while simultaneously chatting with several friends on Facebook. Her last recorded words via the Facebook chat console were, “The fumes are suffocating. They fill my eyes with tears. Don’t write me anymore… My room is filled with fumes. I just posted another picture. Even while I’m dying, I still want FB (Facebook). Must be FB poison. Haha.”
  • Last year, a young girl in Georgia walked into classroom unaware as to why everyone in the class was laughing at her. Without her knowledge, two of her classmates had created a fake profile in her name and posted doctored photos and racist and obscene comments in her name. Unable to get these other students to stop cyberbullying her, she is now suing her classmates for libel .

The way that people use Facebook around the globe varies as wildly as the demographics of people using it. Some uses are sad and tragic, while others are funny, unique, and even inspiring. It’s important to understand, however, that global presence and inspiring site functionality doesn’t necessarily equate to a high company valuation. To figure that, the company’s financials must be considered.

The Basics of Facebook’s Financials

Mark Zuckerburg and his team have built a collosal internet giant that stands to make astronomical amounts of cash during their initial public offering (IPO) next month. As they move to push their company into being public owned, they’re currently valuing it at more than 100 Billion dollars.

At first glance, this probably seems like an outrageously high figure for a free service that allows you to chat and keep in touch with friends, but then let’s take a look at how it’s calculated. Last year, Facebook generated over one billion in profit. This would make their price-to-earnings (P/E) ratio equal to 100. This means that they value their site to be 100 times that of last years profits.

Granted, that appears to be an incredibly high P/E ratio considering that the average across the rest of the stock market is a fraction of that number. However, it’s important to remember that right around the time Facebook was being created 8 years ago, Google was taking their online venture public at a valuation granting them a P/E ratio of 120 and today their stock price is 8 times higher than the day they took it public. And as a side note, it’s profit growth over the past 8 years has brought it’s P/E ratio down to around 22 today.

Romancing the Shareholders

These high numbers are justified not by their current earnings, but by their future earnings potential. In a world where 10% year-over-year profit growth is considered strong, Facebook is currently looking at more than 80% year-over-year profit growth. When they stand and project optimism that they’ll continue to see that kind of growth over the next few years, investors are able to see what a terrific opportunity it is to get on board with Facebook’s IPO.

According to Fortune’s  Scott Cendrowski, “Facebook boasts the best attributes of a young company (lightning growth) and a mature one (hefty profits). Its sales are increasing at an 88% compound annual rate. And the company is a prodigious cash generator…” 

In 2011, Facebook brought in over $300,000 in profit per employee and their users, advertisers, and overall revenues are continuing to grow at a staggering pace.

So with this information in mind, is it fair to value Facebook at 100 billion dollars or is this another example of Wall Street throwing numbers at the wind?

Nicholas Cardot

About Nicholas Cardot

It's my personal quest to enable every person that I can to unlock that dormant potential concerning their online influence. Also, I'm a geek.

28 Comments

  • Hmm. There are Actually facebook is poisons for every women indeed they were addicted to it. You knew one girl was attempt to die because of her friends created some fake profiles and uploaded naked pictures with her father.

  • Kevin Martin says:

    While I don’t doubt Facebook’s potential to someday actually be worth 100 billion dollars, I don’t think it’s fair to value Facebook at 100 billion dollars because people are doing so based on wild speculations.

  • Jim Jenks says:

    I would have to agree that it may not be worth that now but that it’s headed in the right direction. But they did just pay $1 billion for Instagram so maybe they have a different valuation equation than most.

  • Andrew says:

    I have to agree that right now I think 100 billion is extremely high. They won’t have the user base they have now forever. G+ will eventually steal some, and people will eventually loose interest in it, get frustrated, or generally annoyed at privacy issues. It’s really scary about the suicide girl though. There will always be people that go to the extreme.

  • Andrew says:

    I have to agree that 100 billion is a huge over valuation. They won’t always have the user base and traffic they have now. People will get tired of the service, find a new one like G+, or get frustrated with privacy issues or updates. It’s really scary about the suicide girl you mentioned. There are always people who take it to the extreme.

  • PEEJAY says:

    VERY WELL SAID NICHOLAS.

    Great post and idea….

    The way how popular facebook today and its number of users, i don’t doubt why mark is selling if for 100billion..

    Maybe he also don’t want to sell it that why he’s pricing it that much…..

    Thank you for sharing this post…

  • Zara says:

    The growth at which Facebook increased its popularity has given a lot of entrepreneurs great ideas on making git big on web sphere. We should all take it positively and try to do exactly what guys at Facebook did.

  • Geoff says:

    I think Facebook has its uses, but when I was on it I just felt too much time was being wasted by me. Still, can’t get way from the fact it is universally very popular, and worth a lot of money.

  • Samuel says:

    All that in 8 years? Not bad. Valuing the company at 100 billion seems reasonable, but I say that in a relative sense. Relative to the phenomenon that is Facebook. Let’s just hope the social networking site’s not a supernova for its shareholders. As unlikely as it seems that Facebook could be gone in another 8 years… it could happen, taking the stocks with it. Probably won’t happen. But it could.

  • It is amazing how FB has become a part of our lives in so many ways. Some good and some bad. I reconnected with childhood friends after 30 years of not knowing what happened to them, but it’s also addicting and can replace social lives for some people which is kind of scary!

  • 450 million users! wow I think myspace barley hit the 30 mill marker. When facebook first started out I didnt think that it would be that popular because your couldnt change your background and tables and stuff, boy was I wrong.

  • Jackson says:

    I don’t think Facebook worth 100 billion dollar but rather the amount of potential it can be and even more.
    With the massive customers base, it is not easy to please everyone especially when they implement new features or changes sometime without asking. Just my 2 cents~

  • Becca says:

    I agree most people only wasting their time using it every day.And there are bad people taking advantage of using facebook.I hope they not only see how they earn and earn but the effect to others poeple lives.

  • john says:

    great article, although if im honest, those facts at the start display an important image as to its power and effect within society…both good and bad

  • Jason Bennet says:

    Facebook does affects most of us but I personally think that it is taking a bit too much of my own time which I can use for better use.

    It is scary to know that there are people who are addicted to Facebook to the level where it completely overtake their real social life.

    But to be worth at that price tag is not practical as I personally think it might be another bubble burst. Who knows as the owner might be thinking of a exit strategy.

  • Nicholas,

    Curious as to the valuation, and being a finance guy, I took the $1 Billion in earnings as a starting point, and assumed that 11 years out it will only grow as fast as the economy, and solved for what does growth need to be over the next 10 years if you need to earn 15%, and the answer is 42%. At that growth rate, in the tenth year they will have $33 Billion in earnings.

    In order to compare – last year Exxon Mobil was the #1 profitable company at $41 Billion, followed by Chevron at $27 Billion, and Apple at $26 Billion.

  • I feel excited about this

  • Menno Bos says:

    Wow, interesting facts. I use facebook daily too, but mostly for checking out what other people say. Though i heard it’s not doing great at the stock market.

  • Alicia Mayer says:

    Right. Facebook is amazingly great. It is on top of social networking sites, with million of users? No doubt.. Nothing is impossible to Facebook when it comes to profit making.. Now, the big question is what are their strategy to make a website like Facebook suddenly gets every internet users attention??

  • Adrian says:

    Thanks Nicholas for drawing our attention towards the FB’s Stakes! Indeed the FB is world 100 billion dollars! and it makes me feel to grab the IPO of FB(Honestly I wasn’t able to get any stake) !
    But recently I heard that GM Motors had turned away from FB in terms of their Facebook ads! So will that incident affect the Facebook’s stock value? Thanks

  • I have very mixed feelings about Facebook. On one hand it’s a great source of information, but on the other hand: what happened to all of us that we can have 300 friends on Facebook and not one real friend in life. We are slowly turning into cyber people… Pretty sad!

  • Lamarca says:

    Cyber bullying is one of the risk in social media sites, since it’s sort of a public place where everyone is free to do and say whatever they want. However, it’s a good medium to market a business. I think this is why it worth billions.

  • edison says:

    i feel really excited about this…wow!
    80% year-over-year profit growth is pretty amazing by the way for something that´s mainly used for social purposes

  • Allen says:

    I think mark zuckerberg would never think that Facebook will travel to 100 billion dollars. Actually, Facebook has got this achievement within very short time period started 2004 to 2011 and still growing. From the infographic and the information, it seems to me that there is not effect to Facebook of its competitors. I love to use Facebook and it really great social network.

  • I think that facebook was over valued at the time of it’s IPO and it’s sharp decline in stock price was expected initially. I don’t agree that there is something fundamentally wrong with the company and once it stabalizes it will become a solid buy.

  • I really think facebook is overrated nowadays! Sure it has more potential but i don’t really know. It’s like Twitter, in the beginning they don’t really know how to monetize it, then some days it really boomed.

  • Nicholas, to simplify the math get Facebook to 100 times current earnings, let’s assume an earnings growth rate better than 88%: a generous 100% or doubling every year. Even then it would take more than 7 years to increase earnings to 100x the current level. But a P/E ratio of 1/1 isn’t necessary. Price to earnings ratios of about 14 are acceptable for major companies. It would take FB only about 3 years to get there. But can FB sustain that kind of earnings growth? Seems like some “irrational exuberance” is needed to speculate at the IPO price.

  • andrew says:

    Vary interesting post. Facebook is amazingly great. It is on top of social networking sites, with million of users? No doubt.I have to agree that 100 billion is a huge over valuation.

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