It would be worth investing in Facebook’s IPO?

by admin on February 20, 2011

On a recently article by the New York Times, Facebook has been apparently valuated in about $50 billion by Goldman Sachs and most likely they will have an IPO debut by the end of this year.

So recently I starting to question myself: is really worth an investment in Facebook at this valuation? Could I make some money on this IPO?. I’m not an economist so my advice is not coming from the financial side of the equation, I’m online marketer and analytics guru that can make logical conclusions based on simple data and trends, so let’s go to the bottom of this comparing this valuation with similar social media companies preparing also for an IPO.

The simplest way to analyze if Facebook is really worth $50 billion is compare its value per user with similar companies; this number is similar to the P/E ratio in stocks, which allows you to compare apples to apples regardless the total value of the company of the company’s shares on this case.

According Facebook itself they currently have 500 million users (even though some people claimed they have already reached the 600 million mark). So in this case the value per user of Facebook is $100 ($50 Billion / 500 million users)

The value per user of similar companies is:

LinkedIn
Currently 90 Million Users and expecting to rise $200 million on IPO will raise its value to $2 Billion, that comes down to a value per user of $22,2 or 4,5 times less than current Facebook valuation in absolute numbers.

Groupon
Groupon’s IPO expected to value the company at 15 Billion (recently rejected an 6 Billion takeover by Google). Groupon has 50 million users; this comes down to a value per user of $300 or 3 times more than current Facebook valuation in absolute numbers.

Pandora
Expecting to rise $100 million will put its value at around 1 billion. http://finance.fortune.cnn.com/2011/02/15/beware-the-facebooktwitter-zyngapandorahuffpo-bubble/ Pandora has a total number of 80 million users which comes down to a $12,5 “Value Per User” or 8 times less than current Facebook valuation. Making Pandora the cheapest opportunity on this pool.

So in general terms I believe that Facebook ($100 Value Per User), Groupon ($300 Value Per User), LinkedIn ($22,2 Value Per User) or Pandora (12,5 Value Per User”); are currently over-valued but just for one reason… they are not even close to generate all that much money per user, at all. Let see Facebook for instance:

It is very likely that the final valuation of Facebook if they decide to go public by the end of the year will be around the $100 – $200 Billion, which will put them at the same category of Google currently at $202 Billion; this valuation will increase its value per user to $200 or even $400…

Let’s go with the conservative number of today of 50 Billion valuation, and let’s calculate how much money Facebook is doing per user. Last year (2010) Facebook revenues were 2 Billion, or $4 per user (2 Billion Revenues / 500 Million Users), now you can see probably the incoherence here: a company that has been valued at $100 per user is actually generating $4 per user, and this is not considering operational costs and debts; profits may be around just $1,50 per user, best case scenario. In other words you may need 66 years just to recover your investment. LinkedIn and Pandora just turned out profitable and they are barely making money, Groupon is generating $16 per user but has been valued at $300 per user (800 million revenues 2010 / 50 Million users)

The only people that will make money on these transactions are the investment banks and private investors that already put their money in. These valuations remind me the Dot-Com era where financials were a lot less important than the potential opportunities that never materialized… and Benjamin Graham would said… thanks but not… I prefer to let the opportunity go.

For a great financial analysis of these IPO’s you can also read this great article of Duff McDonald at Fortune.

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