Facebook: really 'worth' $30 billion max - $100 billion is hype
The news remains awash with stories about Facebook's (apparently) imminent IPO and the (alleged) valuation of $100 billion. We have published several public articles on why we think Facebook will struggle to justify such lofty valuations going forward (and our subscribers have access to 3 presentations on the subject).
Ahead of a major strategy report on 'Internet disruptors' which we are publishing on Google, Facebook, Apple, Amazon and Skype, here is a little more analysis we have done on Facebook and why we have a maximum valuation of the business of $30 billion.
Maximum penetration likely to be around 50% in any market
We begin with Facebook's user growth. Statistics from www.internetworldstats.com shows Facebook's user numbers by geographic region and the associated penetration. Plotting this against Facebook's user growth shows that there is a relatively strong correlation and that even in a regulatory light market with little direct competition for Facebook, such as the US, growth is likely to stall at around 50% penetration:
Asia, Africa, Middle East will max out at lower than 50% penetration
In many markets Facebook faces substantial regulatory and competitive pressure which means maximum penetration is likely to be significantly below 50%. In China, Facebook is largely banned and faces stiff competition anyway from domestic social networking sites QQ and Renren. In India, Google's Orkut, despite being ousted from its number 1 spot by Facebook remains popular and Google+ is attracting followers fast. As a result, Facebook's penetration in India is currently around 2.6% of the population. We have estimated the 'theoretical maximum' number of users that Facebook is likely to get in any region (based on competitive, regulatory and socio-demographic factors) and then estimated where it might get to in 5 years:
Our conclusion is that Facebook will reach a maximum of around 1.4 billion users (double its current figure) and in 5 or so years will get to around 1.05 billion.
Monetising users: Facebook is getting better but behind Google
Its revenue numbers are not published, but we estimate that Facebook generated revenues of $1.5 billion in 2010 and will increase this to $3.5 billion in 2011. These estimates are not too far from others available in the news. This equates to average revenue per user of $2.6 in 2010 and $4.7 in 2011. This is a substantial uplift on previous years but a long way behind Google's equivalent figure of around $17 in 2011. We have assumed that Facebook will continue to get better at monetising its user base (despite privacy issues continuing to be a problem) and forecast that it reaches $12.1 per user per year in revenue by 2017:
STL Partners valuation for Facebook of $30 billion
Our final assumption is that Facebook is able to generate a free cash flow margin of 12.5% on its revenues consistently going forward. This is a little bit lower than Google but still a healthy return to investors. Applying these numbers to our forecast user numbers and revenue per user gives the results in the table below. Note, revenue is forecast to reach $12.75 billion by 2017 (a major increase). A discount rate of 10% applied to the free cash flow stream, gives us a valuation of $30 billion:
We undertook a little sensitivity analysis and reckon that for Facebook to justify a valuation of $50 billion it would need to either hit 2 billion users or average revenue per user per year of $23. This seems unrealistic.
Of course, this is not to say that any Facebook IPO wouldn't attract enormous interest, and as our friend Richard Kramer at Arete Research likes to point out, many tech valuations are irrational. We doubt such irrationality will stretch to the $70bn difference between our top-end valuation of $30bn and the market hype of $100bn, but it's possible that high initial interest will heat the price early in the trading.
Nonetheless, as a result of this work, we retain our stance that Facebook will be under enormous pressure to find new sources of growth and that a move into telecommunications seems likely. We are beginning to see early signs of this with the company's deals with Jajah and Skype and we expect this to accelerate in future. In the upcoming report, we cover Facebooks' business model and strategy in detail and how the telecoms industry should respond to it.