#Facebook at 100 (Almost)
So Facebook's finally filed to do an IPO. Should you like? A year ago, I posted about how a $50 billion valuation might make sense. Today, the target value floated by folks is ~$85 billion. One way to look at it then, and now, is to ask whether each Facebook user (500 million of them last January, 845 million of them today) has a net present value to Facebook's shareholders of $100. This ignores future users, but then also excludes hoped-for appreciation in the firm's value.
One way to get your arms around a $100/ user NPV is to simply discount a perpetuity: divide an annual $10 per user cash flow (assumed = to profit here, for simplicity) by a 10% discount rate. Granted, this is more of a bond-than-growth-stock approach to valuation, but Facebook's already pretty big, and Google's making up ground, plus under these economic conditions it's probably OK to be a bit conservative.
Facebook's filing indicated they earned $1 billion in profit on just under $4 billion in revenue in 2011. This means they're running at about $1.20 per user in profit. To bridge this gap between $1.20 and $10, you have to believe there's lots more per-user profit still to come.
Today, 85% of Facebook's revenues come from advertising. So Facebook needs to make each of us users more valuable to its advertisers, perhaps 4x so to bridge half the gap. That would mean getting 4x better at targeting us and/or influencing our behavior on advertisers' behalf. What would that look like?
The other half of the gap gets bridged by a large increase in the share of Facebook's revenues that comes from its cut of what app builders running on the FB platform, like Zynga, get from you. At Facebook's current margin of 25%, $5 in incremental profit would require $20 in incremental net revenue. Assume Facebook's cut from its third party app providers is 50%, and that means an incremental $40/year each user would have to kick in at retail. Are each of us good for another $40/year to Facebook? If so, where would it come from?
My guess is that Facebook will further cultivate, through third-party developers most likely, some combination of paid content and productivity app subscription businesses. It's possible that doing so would not only raise revenues directly but also have a synergistic positive effect on ad rates the firm can command, with more of our time and activity under the firm's gaze.