Reuters Breakingviews - Is Facebook Truly Worth $23 Billion? - NYTimes.com

Is Facebook Truly Worth $23 Billion?

June 29, 2010

Facebook has latched on to some good friends. Elevation Partners, a venture capital firm, just gave the social networking company a valuation of $23 billion in its latest secondary market purchase of 2.4 million shares. That’s more than triple what Facebook appeared to be worth a year ago. And at nearly 30 times trailing sales, it’s about twice the multiple Google achieved when it went public in 2004.

Valuing Facebook, even on the back of an envelope, isn’t easy. The gray market trading in shares doled out to employees is illiquid, and the company, which is privately held, discloses limited data. But Facebook is growing at a breakneck pace. It now has almost 500 million users, nearly twice as many as it had last summer. The company has said it is cash-flow positive, but profit, and Facebook’s ability to scale up, are still unclear.

So consider revenue instead. Facebook generated almost $800 million, mostly from advertising sales, in 2009. That’s roughly 2.5 times as much as it took in in 2008 based on the buzz in Silicon Valley.

There’s potentially plenty of growth to come. The average working adult spends more than 12 hours a week online, yet the Internet accounted for just 13 percent of all ad spending last year, according to ZenithOptimedia. Facebook’s rising popularity means it should be attracting a bigger chunk of a rapidly enlarging pie.

On that optimistic basis, a multiple of 30 times revenue is certainly rich, but not necessarily absurd. When Google was floated, its revenue was increasing at a similar pace. The search giant went public at about 14 times trailing revenue, and the stock doubled in four months. Sales and the shares both continued to rise sharply.

Yet the comparison’s value stops there. Revenue is nice, but it’s not profit. Google charged into the black earlier on. What’s more, Facebook’s expansion relies on places like India and Russia, where many customers are relatively poor. And the company’s ability to generate more cash from existing users may be hamstrung by privacy concerns. As a business, Facebook has promise. But investors appear to be way out in front of it.

Tesla’s Grand Debut

Tesla has managed a rare feat: it’s a stock market hit. That must embolden General Motors, not to mention other nonauto companies, to push ahead with its own initial public offering.

If an unprofitable electric sports car manufacturer that isn’t expected to earn a dime until at least 2012 can succeed on the markets, surely it’s a sign that investors are more receptive to new share sales after a turbulent six months.

After all, more I.P.O.’s have been pulled in the United States than have begun this year, by a count of 71 to 68. Of the ones that have come to market, 20 priced below the mooted range and 40 now trade lower than their I.P.O. prices, according to Thomson Reuters data.

Yet Tesla has achieved a new-issue trifecta: increasing the numbers of shares sold, by a fifth; being one of just six to price above its range; and the stock surging on its first day of trading, by 40 percent, amid a broad market sell-off.

Executives of would-be public companies should curb their enthusiasm, however. Tesla makes cars, but it’s actually more of a technology play: more of its new shareholders are tech or alternative energy specialists than industrial-sector investors. G.M. can’t replicate that. Also, electric cars are likely to be a growth business, and, here, Tesla is an industry leader.

Tesla has its risks. The company faces a production hiatus when one of its major suppliers retools its factory. And Tesla already cautioned earlier in the year that the I.P.O. proceeds would allow it to stay afloat only for a couple of years. If it doesn’t turn a profit when planned, investors will either lose some or all of their money, or need to stump up more cash.

But for investors seeking the next big thing, Tesla’s is still an appealing story. And the success of the I.P.O. process implies that the company’s executives and bankers have pitched it well. G.M. and others probably would need to follow Tesla’s playbook nearly word for word, or sell into a much sounder market, to guarantee such success.

ROBERT CYRAN and ANTONY CURRIE

For more independent financial commentary and analysis, visit www.breakingviews.com.

Reuters Breakingviews - Is Facebook Truly Worth $23 Billion? - NYTimes.com

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