Friday, January 7, 2011

Is Facebook worth $50 billion?

Is Facebook worth $50 billion?
By Jennifer Valentino-DeVries

The social-networking giant raised $500 million from Goldman Sachs Group Inc. and Russian firm Digital Sky Technologies, putting its valuation at $50 billion, the Journal’s Anupreeta Das confirmed. The New York Times had earlier reported the investment.
Does that number make sense? First, let’s compare Facebook’s valuation to the market capitalization of other Internet companies — Yahoo, EBay, Amazon and Google. Yahoo comes in at $21 billion, and Google is at about $190 billion. (Sure, it’s not apples to apples. Among other things, the other companies are more mature. And Amazon and EBay, as e-commerce companies, aren’t competing for Web surfers’ eyeballs the way Google and Yahoo are. But still. Worth a look.)

When you take a look at revenue, Facebook is bringing up the rear, as far as estimates for fiscal 2010 go.

But when it comes to reach, Facebook is a real competitor, J.P.Morgan analyst Imran Khan points out today in his 2011 Internet investment guide. As a percentage of U.S. Internet users, Facebook is behind both Yahoo and Google, but people spend more time on Facebook — and Facebook usage is growing.

And it’s not just about traffic, Mr. Khan says. He makes the case that Facebook has an edge on portals like Yahoo because it doesn’t have to rely on advertising space. Instead, he says, Facebook’s value is as a “platform” — like a credit-card company, it can enable other businesses and charge them a small fee when users buy from them. And he’s not just talking about social games like FarmVille; he means e-commerce, online payments and even fees for content.

That’s the bullish case. The bears, of course, point out that social networking is still in its infancy, especially as a moneymaking “platform.” Facebook is moving to cement its ubiquity, with log-ins across the Web, but the space could still face a shake-up. And the company still has a ways to go to before it makes as much money from each user as Yahoo and Google do; the J.P. Morgan analysts estimate Facebook generates $4 per user, while Yahoo gets $8 and Google gets $24.

For Goldman, though, this long-term speculation might not matter, Felix Salmon at Reuters points out. The investment means Goldman will be sitting pretty when it’s time for Facebook to pick a bank to lead its IPO, and that alone could generate massive fees. “Facebook doesn’t need to stay worth $50 billion forever — Goldman just needs to engineer an IPO valuation somewhere north of that, then exit quietly in the public markets,” he writes.
Readers, what do you think? Was this a good move by Goldman? And does Facebook merit this valuation?

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