Facebook’s stock is now changing hands at a $56 billion valuation.As far as we know, most people buying the stock at that valuation have no idea what Facebook’s financial performance is–they’re just buying a gigantic user base.
But it’s still worth spending a couple of minutes thinking about it.
Facebook is said to have about $2 billion of revenue this year. That means the stock is changing hands at a woozifying 25X revenue multiple.
Could that be justified?
Yes, if Facebook has absolutely explosive revenue growth over the next several years and a huge profit margin (think Google or Microsoft). If Facebook’s revenue grows to, say, $5 billion next year and $10 billion in 2012, 25X revenue today could be a reasonable multiple.
And how about the valuation relative to earnings?
Let’s assume that Facebook is modestly profitable this year. Specifically, let’s assume it has a 10%-20% operating margin. After tax (assume 35%), that would produce a net profit margin of 7%-13%. This would mean Facebook would have earnings this year of $130 million to $260 million.
Under those assumptions, Facebook’s $56 billion valuation implies a price-earnings ratio of 215X-430X.
Is that expensive?
If Facebook can get to $10 billion of revenue in 2012, with, say, a 40% operating margin (~30% net), then the P/E gets more reasonable: 20X.
But given that Facebook is already 6 years old and it only has $2 billion of revenue (“only”), $10 billion in 2012 may be a stretch. And the same for a 40% operating margin.
So it seems safe to conclude the that investment logic most of the buyers at $56 billion are using is this:
“Facebook is gonna be huuuuuuuge!”
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