Does it really take an econophysicist to grasp the obvious? It took two of them – Peter Cauwels and Didier Sornette, of the Swiss Federal Institute of Technology in Zurich – to develop a study claiming that Facebook’s valuation was nuts.
VatorNews reports that they ‘have devised a novel way to determine the true value of big social media giants, such as Facebook, Groupon, LinkedIn, Pandora, Twitter and Zynga.’ The report continues: ‘Ultimately, it’s just a numbers game.’
The econophysicists hang their analysis on one metric: number of users. From there, they try to determine revenue per unique user, build in some assumptions and model the valuation. According to VatorNews:
Cauwels and Sornette came up with three different growth scenarios: a base case, a high growth and an extreme growth scenario. “Using a discount factor of 5%, a profit margin of 29% and $3.5 of revenues per user per year yields a value of Facebook of $15.3 billion in the base case scenario, $20.2 billion in the high growth scenario and $32.9 billion in the extreme growth scenario,” they explained in the report.
Some of the numbers these guys used, of course, don’t reflect reality. That isn’t such a big deal, though, as the valuation range typically used, $65 bn to $100 bn, has nothing to do with the real world either.
Cauwels and Sornette project that Facebook would need to increase its profit per user by 3X to 6X in order to justify the existing valuation of the company.
In the end, none of this matters. Until the company goes public, no level of sophistication will change the act that we’re all guessing.