So Facebook finally filed their long awaited S-1
You can get it here
At the highe end of the price range implied, Facebook will be valued at a cool $100B.
ONE HUNDRED BILLION DOLLARS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Bill Gurley from Benchmark has an interesting post up as to why the price range makes sense. Given that Bill and I have similar backgrounds - both of us worked as equity research analysts at First Boston back in the 90's - we spent a ton of time on this stuff and his arguments are cogent. Read them here.
I have a slightly different take on the matter - which is to look at the company with an eye toward expectations.
Last year, the company produced $3.7B in revenue and $1.75B in operating income. Adding back depreciation and amortization of $323M you get EBITDA for the company of almost $2.1B. Capital Expenditures exceeded D&A by about $300M at $600M so you have a situation where new capital expenditures are exceeding D&A - so adjusted and normalized - EBITDA is probably a normalized $2B or about 55% of revenue - a fantastic number.
The question is just what are you paying for when you invest in Facebook at a $100B market cap.
Let's assume that your required rate of return or hurdle rate is 10% per year and your holding period is 3 years.
Thus, in 3 years, Facebook would need to be valued at something like $133B for it to be worth purchasing today.
And what combination of factors could lead to this?
Assuming the company improves it's EBITDA margin to 60% (not unrealistic as it scales revenue over cost) and a roughly 20X EBITDA valuation, you would need $6.6B of EBITDA or $11B in revenue - about triple from the 2011 number.And that would be a 2015 expected number - so they really have 4 years to get there.
Is this possible?
My guess is that it is.
This would represent a 33% annual growth rate in revenues, and currently the company is growing at over 50% - so clearly within the realm of reason.
The Facebook ad platform has not been nearly optimized like Google's has - and as people add more interests and more information to the social graph, Facebook should be able to do a better job of targeting advertising to individuals. Better targeting means higher CPM's, and higher CPM's lead to higher revenue.
Now all that said, it's not an easy task - and you are making a bunch of assumptions - but that's what valuation is all about.
At Raptor Ventures, we're not in on the Facebook bonanza directly, but we are partnered with Graph Science, a Menlo Park based company that specializes in Facebook ad optimization. If Facebook is to grow revenues by over 33% per year for the next 5 years - someone is going to have to help optimize all of that traffic here and abroad and Facebook will be under intense pressure to do so more quickly. We like derivitive investments on Facebook's growth - and are super happy with our partner Raymond Rouf and his team. If the expectations even come close to coming true at Facebook - we think we will have found a real winner in Graph Science, and I suspect there will be a ton of other winners in the ecosystem.