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Is Facebook Really Worth Fifty Billion Dollars?

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Written and Edited by Gregory Bartolomei

The most recent valuation of Facebook says that the private firm is worth fifty billion dollars after a five hundred million dollar investment by Goldman Sacks Inc. This valuation seems to be more like a speculation. The value of Facebook is accounting terms is that it booked a reported two billion dollars in sales at the close of the fiscal year 2010 which makes Facebook the largest and fastest growing internet firm in the history of internet firms.

Is Facebook really worth fifty billion dollars?

An application of a basic model for valuing a firm (a firm’s value is the present value of all its future cash flows) or [Cash Flow of a Firm + (1+growth rate)]/ Discount Rate seems justified to ball park the value of Facebook.

Let Cash Flow= 2 Billion – last years cash flow.

Let Growth Rate = 5% – as a lack of data will not allow for a calculation of a sustainable growth rate.
Let the Discount Rate= 4% – the prime rate for 2010.[$2,000,000,000+(1.05)]/.04= $52,500,000,000This basic valuation puts the current valuation two and half billion dollars short. However, this valuation does not account for risk systematic or unsystematic, increases or decreases in the growth/discount rate, and other variables that could have an adverse effect on Facebook’s value.For example, what would happen if Facebook’s servers were hacked? This not an unfounded question. Already users are seeing applications inside of Facebook that are designed to hack personal information. What would happen if a user decided to take down the network? That would be a catastrophic system failure.

Another potential issue is the current lawsuit that Verizon is filing over the Net Neutrally Laws. Since an increasing number of Facebook users are going mobile (using the mobile application for Facebook) there is a threat that a change to the current laws could adversely effect a mobile users access to Facebook. While not as catastrophic as a hack, loosing or diminishing the mobile interface would reduce the value of Facebook to its users and in turn advertising firms that buy information from Facebook.

Additionally, internet privacy laws could be rewritten. Currently, sites like www.thepiratebay.orgwww.bittorrent.com, and www.facebook.com enjoy not dealing with privacy laws. While The Pirate Bay and Bit Torrent enjoy facilitating p2p of music, video, books, programs, operating systems, and anything else that can be uploaded to the internet they are in violation of copyright laws (as defined in the USA.) While they are in a sense untouchable, many companies (namely internet providers) are being pressured into preventing their customers from accessing such site and committing copyright violations. This situation faced by The Pirate Bay and Bit Torrent is very similar to the situation faced by Facebook.

Because of the wealth of personal information loaded onto Facebook, there is a concern that Facebook is selling that information to marketeers. Another concern is that users whom are seeking jobs are being scoped out on Facebook by recruiters. Facebook is supposed to be the social experience and both of these factors represent a dilemma for its users. However, these issues also represent dilemmas for lawmakers. Facebook represents uncharted waters; should marketeers not have access to publicly stated information? Should firms not have the right to view a Facebook profile to evaluate the mettle of a potential employee? If the law rules that Facebook can not provide users information then that adversely effects Facebook’s fiscal purpose. If the law rules that firms can review profiles, will there be a decline in overall usage thus effecting the amount of information Facebook can provided; effecting its total sales?

If it is assumed that these three issues have a 5% chance of happening (all things being equal) than adding an addition 15% to the discount rate in the basic valuation expression previously used should give an adjusted valuation.

Let Cash Flow= 2 Billion – last years cash flow.

Let Growth Rate = 5% – as a lack of data will not allow for a calculation of a sustainable growth rate.
Let the Discount Rate= 4% – the prime rate for 2010 plus 15% for risk.[$2,000,000,000+(1.05)]/.19= $11,052,631,578.This valuation shows almost an 80% reduction in the value of the firm.While these valuations are crude (there is a real lack of data because Facebook is not reporting its finances) they are not dismissible.

I would argue that the valuation of Facebook has not successfully accounted for many of the risks that it faces going into its future operations. While the firm represents great potential for making money, people should not be so eager to throw their money at Facebook. In an objective sense Facebook is a young unproven technology that carries an equal amount of risk for the rewards that it is offer.

Facebook is too good of an investment to be true – thus it is not worth fifty billion dollars.

It should be noted that the three risks discussed do not considered all of the factors that could effect Facebook. A thought out Porter analysis or a SWOT would yield many other risks or perhaps growth opportunities.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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