Facebook Valuation

Facebook is a well-designed social network. However, it is a closed system. This makes it difficult to determine its true worth. Microsoft invested $240 Million for a 1.6% equity stake in Facebook, thus, according to some, it values Facebook at approximately $15 Billion. Is this number a good indication of Facebook’s market capitalization? Let’s look … Continue reading “Facebook Valuation”

Facebook

Facebook is a well-designed social network. However, it is a closed system. This makes it difficult to determine its true worth. Microsoft invested $240 Million for a 1.6% equity stake in Facebook, thus, according to some, it values Facebook at approximately $15 Billion. Is this number a good indication of Facebook’s market capitalization? Let’s look at some numbers and find out.

NUMBERS

Facebook’s current numbers are:

  • 52m users
  • 25m active users
  • 65b pageviews/month
  • 350 employees

Now, let’s play with the numbers and come up with some rough estimates. Markus Frind, CEO of PlentyOfFish, gives some Facebook numbers:

  • 0.05% CTR
  • $0.34 CPC

Combining the information above, we can determine the following:

Revenue

  • 65b pageviews/month * 0.05% CTR * $0.34 CPC
  • $11m/month in revenue
  • $133m/year in revenue

Employee Estimates

  • $125k salary + $25k benefits = $150k compensation/employee
  • 350 employees * $150k = $52.5m/year employee compensation

Office Space Estimates

  • $50/year sq. ft office space
  • 100k sq. ft office space
  • $5m/year

Equipment Estimates

  • $5k per employee/year
  • 350 employees
  • $1.8m/year equipment costs

Data Center Estimates

Servers

  • 2k active users/compute server
  • 20k active users/disk server
  • 25m/2k = 12.5k compute servers
  • 25m/20k = 1.25k disk servers
  • $2,500/compute server
  • $7,500/disk server
  • 12,500 compute servers * $2,500/compute server = $31.25m compute servers
  • 1,250 disk servers * $7,500/disk server = $9.375m disk servers
  • $41m servers for current user base (one-time)
  • 5% annual failure rate = $2m
  • 5-year server lifespan
  • $41m/5 + $2m = $10.2m/year server costs

Electricity

  • $0.15/kWh
  • 0.4 kWh/compute serve
  • 0.8 kWh/disk server
  • 12.5k compute servers * 0.4 kWh * 24 h * 365 days = 43.8m kWh
  • 1.25k disk servers * 0.8 kWh * 24 h * 365 days = 8.76m kWh
  • 52.56m kWh * $0.15/kWh = $7.9m/year electric costs

Bandwidth

  • $0.10 GB bandwidth
  • 100 KB/page = 0.0001 GB/page
  • 65b pages/month * 0.0001 GB/page = 6.5m GB/mo
  • 78m GB/year
  • $7.8m/year bandwidth costs

Rack Space

  • $1200 Rack/year
  • 42 servers/rack
  • 13,750 servers = 328 Racks
  • $0.4m/year rack space costs

Totals

  • $10.2m + $7.9m+ $7.8m + $0.4m = $26.3m/year for 25m active users
  • Total Cost Per User $1.05/year

Earnings

  • $133m/year Revenue
  • -$52.5m/year Employee Compensation
  • -$5.0m/year Office Space
  • -$1.8m/year Equipment
  • -$26.3m/year Data Center
  • $47.4m Net Income

With some people saying that Facebook has a valuation of $15 Billion, my rough estimate of $47.4 Million in 2007 annual earnings gives Facebook a P/E ratio of 316. Which is extremely high! Even if active users double in 2008, then the P/E will still be over 150. If Facebook had a P/E ratio similar to Google’s at 55, then its valuation would be $2.6 Billion. If Facebook had a P/E ratio of 100, then its valuation would be $4.7 Billion. Unless Facebook’s new platforms are a huge success, it’s difficult to justify the $15 Billion price tag.



PLATFORMS

Facebook platforms include:

  • Social Network
  • Social Ads & Project Beacon
  • F8 Platform

In particular, Social Ads, which is Facebook’s internal advertising system to place ads on user profiles and Project Beacon which places Facebook’s ads on affiliate websites will be huge to their growth. In fact, it puts Facebook in direct competition with Google’s AdWords and AdSense and Yahoo’s Advertising and Publishing Networks. Facebook is making a huge play by mixing advertising with the social graph. If Facebook can generate significant earnings from its new advertising platform, then its current valuation may be justified.



CONCLUSION

If Facebook can generate $200m in net income in 2008, then at a valuation of $15 Billion its P/E ratio would be 75. That would not bad at all for a fast growing company. Let’s see what happens.

23 thoughts on “Facebook Valuation”

  1. Thanks for that! Planned to play with the numbers myself, but didn’t have the time yet. Your calculations confirm my guts feeling though…

  2. Your calculation is realistic. If I use the valuation method of earnings capitalization, which is problematic. For example,if you put your money in the bank and expect to earn a guaranteed annual rate of 5%, you need to invest $948m in order to get $47.4m net income/yr. At least, the ballpark figure is
    roughly $1b. With discounted cash flow valuation, it may go up to $2b-3b depending on how you tweak your cash flow assumption.
    I appreciation your down-to-earth valuation.

  3. Your figures for the power used by servers is way too high given current hardware specs. Also, you need to multiply the cost per rack/year prices by at least 10 I would imagine…

  4. Also… bandwidth costs are more likely to be $0.02 or $0.01 per GB, yours are way too high, and the power figures for servers are kW (the 0.4 and 0.7 numbers you use) *not* kWh – big difference!

  5. I keep thinking of things as I type 😉

    You’re also forgetting cooling costs and other overheads for the servers. It’ll cost between 60% and 70% on top of the electricity costs for the servers to power the cooling systems, the UPS and transformer and distribution losses at the datacenter.

  6. Robin, thank you for your insight. Where did you get your numbers? They are good to know.

    #6 & #8: The numbers I used for electricity used by the servers, include the electricity for the hardware specs AND the cooling cost, etc. per server. I should have probably broken them out.

    #7: Really? The cheapest I could find is $0.05/GB for bandwidth. Where can one find bandwidth at $0.01-$0.02/GB?

    Anyway, you’ve helped verify that Facebook’s overhead is even more expensive. Thus, their profit margins could even be slimmer!

  7. Glad to help… I’m involved in a company that runs data center facilities.

    The bandwidth costs on the wholesale market will be priced on 95%tile capacity charges rather than per-GB data transfer fees. It wouldn’t even surprise me if their connectivity costs were cheaper even than $0.01/GB.

  8. Can anyone explain to me what on Earth Facebook needs so many employees for? 450 employees for a WEBSITE?????

  9. It’s not JUST a website, just like Google’s not JUST a website. They have a whole ecosystem behind it – advertising, social graph, mobile, platform. So that’s why they have that many employees. Google and Yahoo had similar number of employees at that stage of their relative lifetimes.

  10. gotcha. And I guess their $240 million windfall has made them more hire-happy than ever!

    Question: I figured with “computer server” you mean a web server (pl correct me if I’m wrong). What did you mean by “disk servers”. File/storage servers?

    TIA

    Phil

  11. And also; do you think that FB’s extensive use of memcached servers may actually cut down on your estimated server costs?

    TIA

    Phil

  12. Phil,

    Yes, “compute” server is a web and/or application server; and by “disk” server I mean file/database/storage server.

    I don’t think memcached servers will cut down costs from my calculations, I believe that is already factored in. And if it did, it won’t cut overall costs by much as the data center is about 30% of the overall cost.

  13. Thanks Jesse,

    I’ve just started researching and writing a business plan for a web portal that would include social networking, and your article gave me absolutely invaluable insight and figures I couldn’t find anywhere else.

    Thanks again,

    Phil

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