Latepost The Ipo Of The Decade? My Valuation Of Facebook
The Facebook IPO gets closer together with I don’t mean value I tin laissez passer on the sack position off this valuation much longer. While nosotros don’t have got an offering cost yet, the preliminary estimates are that the companionship volition hold upwards valued somewhere betwixt $75 billion together with $100 billion. As amongst my Skype, Linkedin together with Groupon valuations, I volition introduce my assumptions together with valuation of Facebook, amongst the admission that I have got no crystal ball together with know that your estimates volition hold upwards really dissimilar from mine. So, amongst that disclaimer out of the way, hither are my valuation assumptions for Facebook.
2. Future revenues: Facebook is on a "high growth" path, amongst revenues growing yesteryear 150% inward 2010 together with some other 88% inward 2011, but equally fifty-fifty that sample of 2 observations suggests, the large interrogation is how that growth charge per unit of measurement volition agree upwards art-2-scaling-up-growth" target="_blank">as the theatre becomes larger. I gauge a compounded revenue growth charge per unit of measurement of 40% for the adjacent 5 years together with a scaling downward of that growth charge per unit of measurement to the nominal growth charge per unit of measurement inward the economic scheme (set equal to the hazard gratuitous charge per unit of measurement of 2.01%) by the halt of 10 years. While both assumptions may strike y'all equally conservative, I am effectively assuming that Facebook volition follow a revenue growth path unopen to Google's over the adjacent 8 years, equally evidenced inward the chart below, where I compare Google's actual revenues inward the 8 years since their IPO amongst Facebook's forecasted revenues for the adjacent 8 years:
Since advertising revenues are the drivers of both firms' growth engines, together with they may really good hold upwards competing for the same advertising dollars, I mean value a comparing of their competitive advantages is inward order. Facebook's primary payoff is that they tin laissez passer on the sack utilisation what they know almost their users (which is a lot... scary thought!) to offering focused advertising. Google's payoff is that it has a to a greater extent than at nowadays together with slow trouble organization model, since its revenues come upwards from user clicks. In contrast, Facebook has to hold upwards careful almost making its focused advertising also obvious, since some users volition uncovering this creepy. Google has added other products to its mix, amongst the Android equally the most prominent example, together with Facebook also has potential avenues for expansion.
3. Operating margin: Facebook has a phenomenal pre-tax operating turn a profit margin inward excess of 45%. To furnish a contrast, Google's operating margin is currently almost 31% together with has seldom exceeded 35%. However, Facebook's margins volition come upwards nether pull per unit of measurement area equally they actively assay out to a greater extent than revenues together with I am assuming that the pre-tax margin volition decrease to 35% over the adjacent decade. Even amongst this assumption, I am estimating operating income for Facebook volition transcend Google's yesteryear a broad margin over the 8 years next the IPO:
For those of y'all who are familiar amongst my valuations of Linkedin together with Groupon, y'all volition annotation that I am to a greater extent than positive almost Facebook than those companies. Part of that tin laissez passer on the sack hold upwards attributed to Facebook beingness farther along inward developing a trouble organization model that plant together with delivers profits. Another reason, though, is that Facebook has a existent run a hazard at beingness the adjacent “winner have got all” company. What am I talking about? In conventional businesses, a companionship that gets a large portion of the marketplace is champaign of written report to competitive assaults that cap the marketplace portion together with cut back profitability over time. In some parts of the applied scientific discipline business, controlling a large portion of a marketplace seems to laissez passer on the winner the capacity to have got over the whole market. Consider 3 large winners from the terminal xxx years. Microsoft started off inward the “office suites’ competing amongst many players inward the discussion processing, spreadsheet together with presentation plan businesses, but at some point, its authorization drove the contest out. To a lesser extent, Amazon’s authorization of online retailing together with Google’s ownership of online advertising (so far) reverberate similar “winner have got all” phenomena. I am non suggesting that Facebook has a lock on social media advertising, but it has a run a hazard to instruct a large chunk of it, together with if it does, the value that I estimated volition hold upwards also low. Note that the simulation does yield values of $120 billion or higher for the company, if the stars align.
Would I purchase Facebook stock, if its equity were valued at $75 billion? No, together with non because I believe that the cost is outlandish, but for 2 other reasons.
1. Where Facebook stands correct now: I started amongst the Facebook S-1 filing which contains their financials from terminal year. The pdf version is available here, amongst my highlights together with annotations (just ignore my snarky comments... I cannot assist them). Looking at the most recent year's numbers, hither is what I see:
(a) Revenues inward 2011 were $3,711 million, upwards 88% from revenues of $1,974 meg inward 2010, which, inward turn, were upwards 150% from revenue of $777 meg inward 2009.
(b) The firm's pre-tax operating income increased from $1,032 meg inward 2010 to $1,756 meg inward 2011. The firm's internet income increased from $ 606 meg inward 2010 to $ 1 billion inward 2011, though a 3rd of that internet income was prepare aside for participating securities (convertible preferred together with restricted stock units... More on that later...). Incidentally, Facebook paid 41% of its taxable income equally taxes inward 2011.
(c) The companionship is primarily equity funded together with its bulk value of equity at the halt of 2011 was $5,228 million; the only debt on the books was $398 meg inward working capital alphabetic quality leases. They did have got operating lease commitments, which when capitalized yielded a value of $776 million. The full debt is therefor $1,174 million.
(a) Revenues inward 2011 were $3,711 million, upwards 88% from revenues of $1,974 meg inward 2010, which, inward turn, were upwards 150% from revenue of $777 meg inward 2009.
(b) The firm's pre-tax operating income increased from $1,032 meg inward 2010 to $1,756 meg inward 2011. The firm's internet income increased from $ 606 meg inward 2010 to $ 1 billion inward 2011, though a 3rd of that internet income was prepare aside for participating securities (convertible preferred together with restricted stock units... More on that later...). Incidentally, Facebook paid 41% of its taxable income equally taxes inward 2011.
(c) The companionship is primarily equity funded together with its bulk value of equity at the halt of 2011 was $5,228 million; the only debt on the books was $398 meg inward working capital alphabetic quality leases. They did have got operating lease commitments, which when capitalized yielded a value of $776 million. The full debt is therefor $1,174 million.
2. Future revenues: Facebook is on a "high growth" path, amongst revenues growing yesteryear 150% inward 2010 together with some other 88% inward 2011, but equally fifty-fifty that sample of 2 observations suggests, the large interrogation is how that growth charge per unit of measurement volition agree upwards art-2-scaling-up-growth" target="_blank">as the theatre becomes larger. I gauge a compounded revenue growth charge per unit of measurement of 40% for the adjacent 5 years together with a scaling downward of that growth charge per unit of measurement to the nominal growth charge per unit of measurement inward the economic scheme (set equal to the hazard gratuitous charge per unit of measurement of 2.01%) by the halt of 10 years. While both assumptions may strike y'all equally conservative, I am effectively assuming that Facebook volition follow a revenue growth path unopen to Google's over the adjacent 8 years, equally evidenced inward the chart below, where I compare Google's actual revenues inward the 8 years since their IPO amongst Facebook's forecasted revenues for the adjacent 8 years:
Since advertising revenues are the drivers of both firms' growth engines, together with they may really good hold upwards competing for the same advertising dollars, I mean value a comparing of their competitive advantages is inward order. Facebook's primary payoff is that they tin laissez passer on the sack utilisation what they know almost their users (which is a lot... scary thought!) to offering focused advertising. Google's payoff is that it has a to a greater extent than at nowadays together with slow trouble organization model, since its revenues come upwards from user clicks. In contrast, Facebook has to hold upwards careful almost making its focused advertising also obvious, since some users volition uncovering this creepy. Google has added other products to its mix, amongst the Android equally the most prominent example, together with Facebook also has potential avenues for expansion.
3. Operating margin: Facebook has a phenomenal pre-tax operating turn a profit margin inward excess of 45%. To furnish a contrast, Google's operating margin is currently almost 31% together with has seldom exceeded 35%. However, Facebook's margins volition come upwards nether pull per unit of measurement area equally they actively assay out to a greater extent than revenues together with I am assuming that the pre-tax margin volition decrease to 35% over the adjacent decade. Even amongst this assumption, I am estimating operating income for Facebook volition transcend Google's yesteryear a broad margin over the 8 years next the IPO:
4. Reinvestment: In i of a serial of posts on growth, I argued that growth art-2-scaling-up-growth" target="_blank">does non come upwards gratuitous (or fifty-fifty cheap). That is truthful for fifty-fifty a companionship amongst the pedigree of Facebook. There is some information inward the fiscal statements almost reinvestment: the companionship had internet working capital alphabetic quality expenditures of $ 283 million, an acquisition that cost $24 meg together with an increment inward working capital alphabetic quality leases of almost $ 480 million. To gauge reinvestment inward futurity years, I assumed that the theatre would hold upwards able to generate almost $1.5 meg inward revenues for every meg inward additional working capital alphabetic quality investment. At this stage, it is impossible to tell what shape the reinvestment may take, but looking at Google over the terminal few years should furnish clues; the companionship has moved increasingly to using acquisitions to augment growth. Lest y'all experience that I am beingness also conservative, I am estimating that Facebook volition generate a render on its working capital alphabetic quality of almost 32% inward yr 10, upwards from but over 26% now.
5. Risk together with cost of capital: Facebook is a companionship that is funded almost solely amongst equity together with piece it is a young, growth company, it does have got a trouble organization model that is working together with delivering substantial profits. While nosotros tin laissez passer on the sack start from the bottom together with piece of employment upwards to a cost of capital, using parameters estimated for Facebook, I volition employ a far simpler approach. Looking across the costs of working capital alphabetic quality of all USA companies at the start of 2012 (you tin laissez passer on the sack uncovering this on my website), I gauge a cost of working capital alphabetic quality of 11.42% for advertising companies. I volition assume that Facebook volition confront a similar cost of working capital alphabetic quality to start. The median cost of working capital alphabetic quality for USA companies is roughly 8% together with equally Facebook grows together with matures, I do conform the cost of working capital alphabetic quality downward to 8%.
6. Cash together with Debt: The assumptions higher upwards are sufficient to gauge the value of the operating assets. Discounting the cash flows dorsum at the cost of working capital alphabetic quality (with changes over time) results inward a value of $71,240 million. To instruct to equity value, I subtract out the outstanding debt ($1,174 million) together with add together the electrical current cash remainder ($1,512 million). While I would usually augment the cash remainder amongst whatever cash proceeds from the IPO, Facebook is opened upwards almost the fact (See S1, page 7) that the proceeds volition hold upwards going to Mark Zuckerberg to embrace revenue enhancement expenses from choice practise together with volition non hold upwards coming to the firm.
Value of equity = $71,240 + $1,512 - $1,174 = $71,578 million
Based on my estimates, the values beingness bandied around ($75 billion- $ 100 billion) are non unreasonable. As amongst my Groupon valuation, I ran a simulation,making assumptions almost distributions for my telephone substitution assumptions (revenue growth, operating margin, cost of working capital alphabetic quality together with reinvestment). The results are summarized below:
Note that the median value of $ seventy billion is unopen to the base of operations instance gauge (as it should) but at that topographic point is a 10% run a hazard that the value could hold upwards greater than $ 117 billion together with a 10% run a hazard of a value of $ 43 billion or less.
Note that the median value of $ seventy billion is unopen to the base of operations instance gauge (as it should) but at that topographic point is a 10% run a hazard that the value could hold upwards greater than $ 117 billion together with a 10% run a hazard of a value of $ 43 billion or less.
7. Value per share: At some phase inward this IPO process, Facebook's investment bankers volition have got to travel far at a value per portion (offered) together with y'all together with I volition have got to create upwards one's take away heed on whether to purchase or not. That could hold upwards messy because Facebook has multiple claims on equity, starting with:
a. Equity options: There are 138.54 meg options outstanding, from before yr compensation schemes, amongst an average maturity of almost 2 years together with an practise cost of $0.75. My gauge of the value of these options collectively, internet of the revenue enhancement benefits that I come across Facebook getting from the exercise, is $3,782 million. I volition internet this value out against the equity value to instruct to a value inward the shares:
Value inward shares = $71,578 meg - $3,782 meg = $67,795 million
b. Restricted Stock Units: In the terminal few years, Facebook (like many other tech companies) has shifted to granting restricted stock units. These are regular shares but the holders who have have got to kickoff rest long plenty amongst the companionship (vest) to lay claim to them together with oft confront restrictions on trading. The liquidity restrictions, inward particular, should brand these shares less valuable than regular shares. There are 380.719 millions shape B shares, inward restricted stock units, that volition eventually travel regular shares together with I volition add together them to electrical current shards outstanding.
c. Class H5N1 together with Class B shares: After the IPO, at that topographic point volition hold upwards 117.097 meg Class H5N1 shares (with i voting correct per share) together with 1758.902 meg Class B shares (with 10 voting rights per share). Other things remaining equal, the latter should merchandise at a premium on the former, though I don't mean value that the expected value of command inward this companionship is significant.
If I have got the equity value, internet of the value of options, together with split upwards yesteryear the full release of shape A, shape B together with RSU shares outstanding, the value per portion that I instruct is $29.05. Allowing for a slight discount (3-5%) on the non-voting shares, I would anticipate that the shape H5N1 shares inward the IPO volition have got a value of almost $28 (assuming that my portion count is right... I volition hold off to instruct a firmer update equally nosotros instruct closer to the offering, before I unopen inward on a per portion value). You tin laissez passer on the sack access the excel spreadsheet amongst the numbers yesteryear clicking here. If y'all don't similar my inputs or assumptions, don't stew almost them. Go inward together with alter them together with come across what y'all instruct equally the aggregate value of equity inward Facebook. If y'all tin laissez passer on the sack postal service it inward the Google spreadsheet that I have got created for this purpose, fifty-fifty better... Let's come across if nosotros tin laissez passer on the sack instruct a consensus value for the company.
If y'all are investing inward Facebook, laissez passer on credit to the companionship for beingness upfront together with honest almost where the might rests inward this company. On page twenty of the filing, y'all volition uncovering this "Mr. Zuckerberg has the might to command the outcome of matters submitted to our stockholders for approval, including the election of directors together with whatever merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the might to command the management together with affairs of our companionship equally a final result of his seat equally our CEO and his might to command the election of our directors. Additionally, inward the lawsuit that Mr. Zuckerberg controls our companionship at the fourth dimension of his death, command may hold upwards transferred to a somebody or entity that he designates equally his successor." H5N1 lilliputian afterwards on page 31, y'all volition uncovering this "We have got elected to have got payoff of the “controlled company” exemption to the corporate governance rules for publicly listed companies. Because nosotros qualify equally a “controlled company” nether the corporate governance rules for publicly-listed companies, nosotros are non required to have got a bulk of our board of directors hold upwards independent, nor are nosotros required to have got a compensation commission or an independent nominating function." Let's hold upwards clear almost this: this is Mark Zuckerberg's companionship together with y'all together with I are but providing him amongst capital.
If I have got the equity value, internet of the value of options, together with split upwards yesteryear the full release of shape A, shape B together with RSU shares outstanding, the value per portion that I instruct is $29.05. Allowing for a slight discount (3-5%) on the non-voting shares, I would anticipate that the shape H5N1 shares inward the IPO volition have got a value of almost $28 (assuming that my portion count is right... I volition hold off to instruct a firmer update equally nosotros instruct closer to the offering, before I unopen inward on a per portion value). You tin laissez passer on the sack access the excel spreadsheet amongst the numbers yesteryear clicking here. If y'all don't similar my inputs or assumptions, don't stew almost them. Go inward together with alter them together with come across what y'all instruct equally the aggregate value of equity inward Facebook. If y'all tin laissez passer on the sack postal service it inward the Google spreadsheet that I have got created for this purpose, fifty-fifty better... Let's come across if nosotros tin laissez passer on the sack instruct a consensus value for the company.
If y'all are investing inward Facebook, laissez passer on credit to the companionship for beingness upfront together with honest almost where the might rests inward this company. On page twenty of the filing, y'all volition uncovering this "Mr. Zuckerberg has the might to command the outcome of matters submitted to our stockholders for approval, including the election of directors together with whatever merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the might to command the management together with affairs of our companionship equally a final result of his seat equally our CEO and his might to command the election of our directors. Additionally, inward the lawsuit that Mr. Zuckerberg controls our companionship at the fourth dimension of his death, command may hold upwards transferred to a somebody or entity that he designates equally his successor." H5N1 lilliputian afterwards on page 31, y'all volition uncovering this "We have got elected to have got payoff of the “controlled company” exemption to the corporate governance rules for publicly listed companies. Because nosotros qualify equally a “controlled company” nether the corporate governance rules for publicly-listed companies, nosotros are non required to have got a bulk of our board of directors hold upwards independent, nor are nosotros required to have got a compensation commission or an independent nominating function." Let's hold upwards clear almost this: this is Mark Zuckerberg's companionship together with y'all together with I are but providing him amongst capital.
For those of y'all who are familiar amongst my valuations of Linkedin together with Groupon, y'all volition annotation that I am to a greater extent than positive almost Facebook than those companies. Part of that tin laissez passer on the sack hold upwards attributed to Facebook beingness farther along inward developing a trouble organization model that plant together with delivers profits. Another reason, though, is that Facebook has a existent run a hazard at beingness the adjacent “winner have got all” company. What am I talking about? In conventional businesses, a companionship that gets a large portion of the marketplace is champaign of written report to competitive assaults that cap the marketplace portion together with cut back profitability over time. In some parts of the applied scientific discipline business, controlling a large portion of a marketplace seems to laissez passer on the winner the capacity to have got over the whole market. Consider 3 large winners from the terminal xxx years. Microsoft started off inward the “office suites’ competing amongst many players inward the discussion processing, spreadsheet together with presentation plan businesses, but at some point, its authorization drove the contest out. To a lesser extent, Amazon’s authorization of online retailing together with Google’s ownership of online advertising (so far) reverberate similar “winner have got all” phenomena. I am non suggesting that Facebook has a lock on social media advertising, but it has a run a hazard to instruct a large chunk of it, together with if it does, the value that I estimated volition hold upwards also low. Note that the simulation does yield values of $120 billion or higher for the company, if the stars align.
Would I purchase Facebook stock, if its equity were valued at $75 billion? No, together with non because I believe that the cost is outlandish, but for 2 other reasons.
- The kickoff is that the cost reflects the expectation that Facebook volition travel a phenomenal success. Anything less than superlative volition hold upwards viewed equally a failure.
- The mo is that what Facebook is brazen almost the fact that they don't come across whatever involve for input from stockholders. In effect, they desire my coin but don't desire me to have got whatever say inward how the companionship is run. This does non jell amongst the notion that stockholders are part owners of the companies that they owned stock in. You may hold upwards comfortable amongst Zuckerberg equally CEO for life but I am not. I am sure as shooting that I am inward the minority on this one, but dissimilar strokes for dissimilar folks....
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