A few days ago, it was reported that Goldman Sachs invested $450 million in Facebook at a $50 billion valuation. That figure is so big that it’s difficult to get my mind around it’s meaning, especially for a private, venture funded company. But it’s obviously a big bet by the most respected financial firm in the world.
But what bet are they making?
The only way I see Facebook making money is on advertising. To me, Facebook is just like a TV channel or any online publication. I use Facebook to consume media. What is different, obviously, is that the media is about my friends rather than famous people or broad culture. But like most media, my life wouldn’t change significantly without Facebook–just like it wouldn’t change without ESPN, CNN, or the Discovery Channel.
Can Facebook deliver more targeted advertising than TV (or even Google) with all of the info it has about connections, preferences, and influence? This is a pretty cool idea. But more and more sophisticated ad targeting algorithms seems like a diminishing margin game. People seem to be too irrational and unpredictable to ever completely conform to a mathematical equation. Is this game diminishing before FB is worth several multiples of $50 billion though? I don’t know.
Per Crunchbase, Facebook has 500 million users. Let’s say each of these users views 5 pages per day on Facebook. When I just loaded my homepage, I found 4 ads (screenshot at right), that don’t seem too relevant to my interests. But let’s assume Facebook has great advertisers and their targeting abilities will improve dramatically in the near future which will include “Likes” by friends and anything else you can imagine. And let’s say that Facebook gets the highest CPMs I can imagine for these ads: $2.00 each. Thus, my very rough valuation of Facebook follows:
(500 million users x 5 pageviews/day x 365 days x 4 ads/page x $2.00 CPM)/1000=$7.3 billion annual revenues.
If Facebook has 1000 employees (per Crunchbase), and they each make a very generous $1 million/year ($1 billion total) and other operating expenses/overhead are another $1 billion, that leaves $5.3 billion left for “profit.” Taking this number over 5 years and assuming Facebook’s growth will continue, the $50 billion valuation seems about right. But this is obviously very hypothetical, and I haven’t done enough research to support the figures in the calculation. The average of 5 pageviews per day may be high, and the CPMs are likely pretty high at this point too. Those are the main two variables in this equation that have the potential to make a big difference.
The other variable that has an impact on this valuation is innovation. What else can Facebook do? Could they be a more closed off, social version of Google? Will we consume all of our content including music, movies, and news through something like Facebook?
What do you think? Is Facebook worth $50 billion? What ways do you see us using Facebook in the future? Thanks for reading and any insight you can provide!