Why Facebook is over-valued

A lot of the reports I see going out in the market give Facebook a value of somewhere in between $75 and $100 billion. I realize that Facebook is unique in the marketplace but I think people are forgetting about some of the comparables in the past. Does anyone remember Friendster or Myspace?

Friendster has not had a valuation since 2009 and in 2011 went through some major changes in its services. Originally, the site was known as a social networking site, one of the first I remember ever using but never being that excited about it. The site, at its peak, was valued at $53 million and at one point turning down a $30 million bid from Google. The most recent data I found on the valuation of Friendster has a transaction value of $26.4 million. Since then, the company has turned into more of a social gaming site and focused its attention in Asia. I just find it funny that no one mentions this when valuing Facebook.

Myspace is a different story and one that I feel is much more important to mention. First of all, at one point someone posted that Myspace at one point had a valuation of $65 billion! That sounds scarily close to Facebok’s valuation. While the posting itself admits this was based on a per user basis coming of Facebook’s valuation and suggests that $5 billion is more acceptable, it did invite that idea. If you want to look at a history of Myspace’s valuation, look here: http://www.theatlantic.com/technology/archive/2011/06/as-myspace-sells-for-35-million-a-history-of-the-networks-valuation/241224/. The most important thing to note is that in June 2011, Newscorp sold 90-95% of its stake in Myspace for $35 million, six percent of what it purchased it at. This gives me a company valuation of around $40 million. The other comparison I want to allude to Myspace has to do with Facebook’s new Timeline. Critics of the new Timeline have said it looks way to much like Myspace. Given these criticisms, shouldn’t the market be wary of these concerns?

While I make a lot of criticisms, it is not to say I do not like Facebook. I think it’s a great social networking platform. They have brought people together in a way that hasn’t been done by anyone else in the social networking space. I wouldn’t be communicating with soccer fans talking trash about Real Madrid (as I’m a Barcelona fan) every time El Clásico comes up. I would not be able to share information with people I know that are completely on the other side of the world in a quick and easy manner. I just think that the market isn’t taking into account the failed social networks in the past.

So basically, I have come up with a ‘back of the envelope valuation’ of Facebook. I have not done a discounted cash flow valuation but rather, I just wanted to take the enterprise values of the street, a well-known NYU professor, Aswath Damodoran, and the two companies mentioned previously. I basically weighted the outcomes of Facebook going the way of Myspace and Friendster each at 10%. I believe that given what has happened in the past, this is not entirely inappropriate and in reality, I think putting it higher would be more correct but since this method of valuation is not the most proper, I think 10% is ok to use. For the other 80%, I have split it evenly between Professor Damodoran’s valuation (see here: http://aswathdamodaran.blogspot.com/2012/02/ipo-of-decade-my-valuation-of-facebook.html) of $70.9 billion and the street’s valuation of $87.5 billion (87.5 being the midpoint between 75 and 100). When I calculate the value using these weighted averages, I get a value closer to $63.4 billion. Following Damodoran’s process, I subtracted debt from the Enterprise Value and added cash to come up with an equity value. After that, I subtracted the option value and came up with a net equity value of about $60 billion. Dividing this by the number of shares mentioned in their filing, this comes up with a value of about $25.69. Again, I want to stress that this isn’t a properly done valuation. But if Facebook is going to be priced at around $30.66 or $41.37 (based on a $75 billion and $100 billion valuation, respectively), the price is just too high. I am not saying the company won’t succeed, but from a value standpoint, it just may be too pricey.

I’m not after Zuckerberg or anything. I just think that instead of his potential $28.4 billion stake in Facebook, it should be more around $20 billion. For a link to my quick math, look here https://docs.google.com/spreadsheet/ccc?key=0Av2Mf-4zrZ4CdHNEWTVYODU3cVh1cGp3emVmVGU4c0E

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