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How Facebook Can Live Up To The Hype

Facebook will be valued at about $100 billion when it goes public this week. What would it take for that valuation to be justified?

As we noted yesterday, the value of a typical big, public company is 15 times the company's annual profit. So a company valued at $30 billion would typically have annual profits of $2 billion.

Facebook will be valued at 100 times its current annual profits. That's because investors expect the company's profits to go through the roof in the coming years.

For Facebook to achieve that kind of growth, some combination of two things will need to happen: The company will need to add more users, and it will need to get more revenue out of each user it has.

The company has been doing both over the past few years, though growth has been flagging recently.

Facebook Revenue Over Time

Notes

*Payments and Fees* represents the fees that developers have to pay to use Facebook for electronic commerce. If a person buys a product on Facebook, the social media network receives a fee. Most of this revenue currently comes from online game maker Zynga.

For Facebook to live up to its valuation, that growth will need to accelerate. If we assume profit margins of 33 percent (lower than the company's current margins, but higher than those of most companies), here's how much revenue-per-user the company would need under different scenarios:

Average Revenue Per User Needed to Be Raised For Valuation

Notes

*Current Average Revenue Per User* was annualized using numbers from the first quarter in 2012.

In other words, even if Facebook grows to include nearly half the people on the planet, it will still also need to increase the amount of money it gets for each user by nearly 50 percent.

For lots more Facebook graphics, see Facebook's Growth And Reach At A Glance

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