Photo: Kimberly White / Getty Images
Is Facebook expensive or cheap at its current valuation? What’s the value of a network? That is a question we have been asking here at CoRise.
Facebook is more than a “social portal” – it is a network. Much of the financial discussion that has taken place since the launch of the popular social networks has been centered around the business models & financial metrics of these new platforms. This does not fully capture the essence & opportunity of assets with their precedent more properly rooted in the phone system than in the business offering that might use it.
Regardless of the ways in which social networks are currently monetized (or not), the true & lasting value of these is in their user community. Over time, the market will monetise this in ways that we may not currently contemplate.
So, while many investors will look at the value of Facebook on an Enterprise Value to Revenues or EBITDA, as well as on a PE basis, we tried to look at it a different way – we tried to measure the value of the network. This is the basis of our recently released report on the value of networks.
A couple things stood out to us as we perused Mark Zuckerberg’s letter to shareholders and compared to our own network theories:
- A network is an interconnection on a large scale, with value that perpetuates itself through usage.
- A network is built on user engagement & depends on this to preserve its value.
- A network is a platform on which business models can be built, but the network itself transcends any single one.
- The ﬁnancial value of a network reﬂects the total of all future business models predicated on paying to use it. Stated differently, the ﬁnancial value of a network is the aggregate option value of its current & future participants.
- The primary focus & main business goal of a network is to perpetually build & protect its base of network users.
So what does this all mean to the current value of Facebook and what it implies?
Our starting point is based on a $100 billion valuation and the 843 million users – this implies a value of $119 per user.
This value of course, should be the net present value of the expected Free Cash Flow of a user over its lifetime. If we make a few assumptions on the weighted average cost of capital, long term growth rate, current margins, etc, we can therefore derive a value for the net present value of revenues that the market is assuming for a Facebook user over its lifetime.
Our calculation indicates just under $400 of revenue per avg user on this basis.
To clarify what this number means: at a $100 billion value for Facebook, this would assume that over the average user’s life on the network, Facebook would only generate ~$400 of revenue (on a net present value basis).
This would account for all known revenue streams, as well as the optionality of what Facebook may introduce in the future.
Is that high or low? We think one could argue that it’s low, depending on what future products Facebook may have up its sleeve.
Interestingly, even at a 50% premium to the $100b market value (i.e. $150b), that would imply under $600 of average revenue per user. Some would say that’s not egregious (once again, depending on what Facebook may introduce).
It’s up to investors to make their assumptions an opinions on what the future revenue streams for Facebook can be, and to be very clear, we make no recommendation to investors. However, we think this framework provides a different lens to think of potential value of not only Facebook, but networks as a whole.