Facebook IPO Valuation Sets Record: Is It Really Worth $104 Billion?

Facebook ipoAs Facebook thunders toward its IPO, the 33 banks tasked with underwriting the offering have been desperately trying to determine how much the social networking website is actually worth. While it is closing in on 900 million users, its rate of growth has slowed and its current advertising model seems to be hitting a snag. Ultimately, the question arises: is Facebook overpriced -- or is it undervalued?

At the IPO price of $38 that was announced Thursday evening, Facebook is priced at the top of the $34-$38 range announced at its filing. That pegs the company's total value at an opening-day record of $104 billion -- and it will have roughly $16 billion more in its coffers come Friday morning. Put another way, Facebook CEO Mark Zuckerberg now has enough cash on hand to buy 16 more Instagrams.

Facebook revenue

But How Much Is It Really Worth?

Even before the stock went on the market, most experts agreed that Facebook was overvalued: As ABC News recently reported, in a survey of 124 portfolio managers and analysts, only 8% said that the stock's value would increase over the next six months.

At the heart of the stellar valuation lie questions about Facebook's actual ability to make money, an issue that was brought into sharp focus earlier this week when General Motors announced plans to withdraw its $10 million advertising buy from the site. While badly timed for the Facebook crew, this decision wasn't that surprising. As numerous experts -- including our own -- have noted, the click-through rate on Facebook ads averages a dismal 0.051%, or roughly one click per 2,000 viewers. In other words, as dozens of other websites have already discovered, customers respond poorly to online advertising, and prefer to shop via sites they find on their own.

What many observers seem to have missed, however, is that even as it was pulling its Facebook ads, GM was redoubling its use of Facebook itself. Between its various brands, factories, distributorships and dealerships, the company has hundreds, if not thousands, of Facebook fan pages. And, as the automaker announced on Wednesday, it has no intention of abandoning Facebook:

Just wanted to let our millions of Facebook fans know, we're still here, and we 'like' you back! We may not be advertising on Facebook at the moment but we'll still be talking with you all daily. If anything, we will be providing more content across our many GM Facebook pages - including Chevrolet, Buick, GMC and Cadillac - to keep the dialogue going.

For critics of Facebook's current ad strategy, it's worth noting -- as some analysts have argued -- that there is nothing keeping the company from charging corporations to establish pages on the site. At this point, a Facebook presence is a cornerstone of almost any social media strategy, and any company, local business, movie, or band that hopes to reach consumers is pretty much required to create a fan page.

Moving Beyond Ads to a Real Business Model

Charging for corporate pages, while unusual, wouldn't be unprecedented -- in many ways, the strategy would be an online equivalent of the model employed by the phone company. Just as the yellow pages are free to customers but subsidized by paid ads, Facebook would be free to individual users but subsidized by businesses. Indeed, as some Internet marketers have noted, creating engaging and eye-catching Facebook pages is already a lucrative business.

The phone company metaphor also fits in comfortably with Mark Zuckerberg's statements about Facebook. As the founder noted in his IPO prospectus letter, "Facebook was not originally created to be a company ... We don't build services to make money; we make money to build better services." Or, as NYU professor and Microsoft researcher Danah Boyd succinctly put it, "From day one, Mark Zuckerberg wanted Facebook to become a social utility. He succeeded. Facebook is now a utility for many." Perhaps the model for Facebook's valuation shouldn't be Yelp or Groupon, but rather AT&T or Con Edison.

Although Facebook hasn't announced any plans to charge for its fan pages, it is in a unique position to monetize social media. If -- when -- it chooses to charge for access to its hundreds of millions of users, questions about the site's financial position will be rendered completely moot.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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Facebook is a big farce in terms of investment. Its 15% actual profit making biz and 85% Virtual advertisement profit. As and investor, I would not buy into something that's based off such a big chunk of virtual ads. Not only that, they have no watchdog to review their actions of how they operate their database that is maintained to keep track of the ads being seen or clicked.
As an advertiser, I would want real data on who seen it, but that would go against facebooks terms to not disclose people info. So they charge the advertiser a fee to list their ads for a certain amount of time, they also charge per time its seen and then they charge when its been clicked and redirected to the advertisers. This tracking info saved in their database can be Altered by them and they have no watchdog to check that. So with Virtual data Manipulation. they can bump up the numbers to charge the clients to pad their profits and how are the clients to check? If all advertisers left facebook like GM did, it would only be worth 15%!
A bit of a quote from one of my favorite anime GiTS, "Didn't place any value on electronic media, something that can be re-written.".
Not to mention the supposed members on Facebook are inflated. Full of multiple accounts, account for peoples pets(*like Zuck's dog), dead people, past charities and de-funked biz. Not all of them are on constantly. Facebook could have employees or outside sources using Bot programs to run thru fake accounts to also give false data.
You cant base the company off such a big 85% of NOTHING!!

May 22 2012 at 6:36 PM Report abuse rate up rate down Reply


May 21 2012 at 11:03 PM Report abuse rate up rate down Reply

I like Facebook and use it but no way is it worth almost $40 a share!

May 21 2012 at 10:19 PM Report abuse rate up rate down Reply

Crazy people buying stock in something that you can't even hold in your hand, something that exists only in cyberspace? Nothingness is worth billions? Since when? Geezzzz Louizzzeee....

May 21 2012 at 9:34 PM Report abuse rate up rate down Reply
mark and wendy

it is to simple for face book to make money,everyone is hooked on facebook everyone I know is on it all day long(not me)they play free bingo and other games all day,there is no way that enen 1 percent of these people will leave facebook,charge them 1 to 5 dollars a month and forget about the advertisers.If they charged that they would bring in 1 to 5 billion a month so that would be 12 to 60 billion a year who would quit facebook where would they go,it is too late THEY ARE HOOKED

May 21 2012 at 6:15 PM Report abuse rate up rate down Reply

Mark, we need help, I am 100 disabled , my wife has been looking for work for eight months, we have no food,or family to help us, and our oldest son wants to go to college, and we do not have the 450 dollars the school demands so he can attent his own high school graduation Can you help one family in Arlington Texas? Mike3855@aol.com

May 21 2012 at 4:30 PM Report abuse rate up rate down Reply

Facebook has no redeeming value. Zuckiie talks about communication value. Communicate what? Gossip?

May 21 2012 at 4:10 PM Report abuse rate up rate down Reply

My theory is:

1. FB is totally undervalued compared to its true potential
2. MZ is THE visionary of our modern history

You can't compare Facebook to any known (Internet) company....

MZ, had he startet eying revenues and cashflows from the beginning, would never have gotten almost one billion customers using the FB network on a daily basis (ca. 1/2 of all Internet users)....When somebody argues the market cap of FB is ex-tremely large ... this is correct but might not be enough in the future: the "FB net" will offer all services the Internet has so far: information, communication and data transfer - all from one well-organized ...source. Step-by-step we will not need any more other networks, data storage / cloud companies ...telephone companies ..., banks .....search engines, shoppping/e-commerce platforms or news agencies. The future will be connected humans, not machines, all through one source, in one net. The new Internet will be FBNET.

Considering this...

- A market cap of only $100 bn or $100 per user is nothing over the future life(!) of this company - and that's what market cap is: discounted future cash flows minus debt!) - that only started 8 years ago
- FB stock is nothing for commercial, egotistical, directionless and fat wallstreet bankers ....this stock is for a 21st century generation ....even Steve Jobs would have been too conservative and too unimaginative to build up and develop a company like FB.
Pls. read full articel at seekingalpha or fool.com

May 21 2012 at 2:49 PM Report abuse rate up rate down Reply
Aaron Cohn

Look at how hard the underwriters had to fight to keep it from closing beneath the IPO price.

That's the market's answer to this question.

May 19 2012 at 7:40 PM Report abuse rate up rate down Reply
Takayuki Ono

Many analysts see just 6months? We have to think about 6years ahead.

May 19 2012 at 1:24 PM Report abuse rate up rate down Reply