The $100B Question: What is Facebook Really Worth?

(The Wall Street Journal) - What is Facebook worth? As investors dug into the company's freshly-released financials, analysts and investors began circulating a range of values -- from as little as $50 billion to as much as $125 billion -- for the social-networking website.

It will be months before the market sets a final price, but already the valuation question has become a tug of war over two essential questions -- Just how fast can the company continue to grow? And can it extract value from advertising in the way it plans?

The company views itself through a relatively conservative lens, pegging its value for employee stock grants at $29.73 per share, giving it a total valuation of $74 billion based on the company's share count of 2.5 billion.

The calculation was performed in a period when the stock market had just suffered a downturn and some internet stocks were struggling.

Since then, Facebook shares have rebounded a bit in private marketplaces to trade at $32 to $33 a share, according to securities traders, which would imply a valuation of about $81 billion.

That is around the low end of an expected range for the company's offering, according to people familiar with the matter. The high end is $100 billion.

Whether it will hit that mark depends largely on growth. Generally, if a company is growing above 50 percent a year, it is considered rapid growth.

Facebook's revenue grew 88 percent in 2011, and net income grew 65 percent. Facebook's growth already decelerated from 154 percent from 2009 to 2010, to the 88 percent it experienced last year. Quarter-to-quarter Facebook profits actually fell during two quarters of 2011 after rising by as much as 92 percent in 2010.

Francis Gaskins, president of IPOdesktop.com, which analyzes IPOs for investors, says he does not believe Facebook is worth more than $50 billion -- 50 times its reported profits for 2011 of $1 billion, or more than triple the market's average price-to-earnings ratio. Google's profits are 10 times that of Facebook, but its stock-market value is $190 billion, he notes.

A $100 billion valuation "would have us believe that Facebook is worth 53 percent of Google, even though Google's sales and profits are 10 times that of Facebook," he said.

While other analysts note that Google is not growing as fast as it did in the years after its 2004 IPO, Gaskins says he was not so impressed with Facebook's recent quarter-by-quarter profit growth.

Martin Pyykkonen, an analyst at Denver banking boutique Wedge Partners, is more bullish, saying the value could top $100 billion. He says Facebook could trade at 15 to 18 times next year's expected earnings before interest, taxes and certain non cash charges, a cash-flow measure known as Ebitda, which he says can comfortably surge from $2.1 billion in 2011 to $4.5 billion in 2013.

By comparison, he says, mature companies trade at eight to 10 times Ebitda. Microsoft trades at seven times, and Google about 10 times, Pyykkonen said.

While that math only justifies an $81 billion valuation, he said Facebook may be able to unlock faster growth in ad spending and reach $5.5 billion in Ebitda, which could justify a higher multiple of 20 times, implying a $110 billion valuation.

Read more: The Wall Street Journal