Two weeks ago, I analyzed Facebook to see how much the company was worth. More recently, I was shocked to see Goldman Sachs paying 25x-28x revenues for the company, while Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) are getting 4-8x revenue. Absurd, I thought, that anyone would pay such a high price for the Facebook stock. I realized that the investors Goldman is pitching to are savvy and are most likely seeing something that we could be missing, (although I agree, some are irrational!)Then I quantified the company's growth. Wow. I am now projecting that its current stock value of $25 will grow by more than 4 times (to $111) by 2014! Here is why:
I extrapolated growth at current levels and I was actually really shocked to see the results. My model is below and hopefully you will be as surprised as I was.
Now the explanation.
Memberships: At current growth levels, membership rates should be around 600 million today (and apparently they are) and at the same trends, the rapid growth should slow, but not before reaching a billion users by 2014.
Revenues: Revenues were split out by Advertising (currently 3 models of advertising, Self Service Ads, Engagement Ads, and Microsoft Ads), Virtual gifts & credits, and other ventures.
- According to my research, the virtual gifts & credits source is that undervalued gem that will be making billions for Facebook in only a few years (currently, I’ve estimated that it brings in 15% of overall revenue, at about $252 million). Growth, however, has been extremely rapid.
- “Other ventures” refers to the accelerated acquisition rate of other companies. Some of these companies already have revenue streams and with growth, this revenue will be a relatively considerable for Facebook.
Operating Margins: Operating margins are high in the industry (Google as a comparable). As the company continues to lower costs, I project an increased growing margin from 30% to 34%.
Taxes: The suspicious low tax is an estimate of the transfer pricing tax model used by Google. The company will try to escape the 35% U.S. corporate tax rate by using overseas havens. The majority of Facebook’s business is now overseas, so it doesn't have to report those taxes in the U.S.
Earnings: I am fairly certain that this is where many will get fairly emotional. Please remember, these are extrapolated using current growth.
2010 earnings should be about $485 million, a 143% growth from the previous year. Using the current rapid growth that the company is seeing, the company should hit $1 billion in profits by 2011. And as the revenue model begins multiplying, profits should be at $6.5 billion by 2014. And all this started in a dorm?!
Stock Valuation: Though at current valuations of $25, the stock is valued at 103x earnings, that multiple will gradually decrease as growth slows. But that won’t stop the stock from hitting $46 by the end of 2011 and $111 by 2014, according to my projections.
Conclusion: The way I see it, Facebook did something no other company has ever done. They somehow managed to take control of 600 million users, placing just about every corporation and organization at Facebook’s behest. A minimal fee structure for the corporations to reach these customers, increases valuations by hundreds of millions.
At the same time, one must be cautious when making decisions based on models. There are lots of risks involved. Three of the biggest risks are the high threat of competitors, growth sustainability (given that Facebook is the pioneer of Social Media and the first to ever reach 600 million users – we are not entirely familiar with all the risks just yet), and the third one is privacy. Sure, we’ve complained, but will we actually stop using Facebook? My opinion is that Facebook is here to stay and the chase has only begun.
Disclosure: I am long AAPL.