In most cases, one would value a publicly traded company by examining its fundamentals and paying close attention to certain metrics such as the current as well as forward looking P/E ratio, etc.. However, in the case of a quickly expanding company in a fast growth mode like Facebook (FB), that is not yet fully monetizing its huge userbase, looking at P/E ratios (even consensus estimates) would be counterproductive to say the least.
Facebook currently has in-depth targeting data on about a billion people and this number continues to grow each and every single day. It's safe to say that no other company in the world has this much targeting data about so many people. Many may not realize this, but we are living at a time when our economy is undergoing a true paradigm shift, and in our new economy data is king. Data is quickly becoming one of the most valuable assets one can own. By having as much data on people as Facebook does, Facebook can easily enter new businesses and generate above average profit margins in those businesses due to its ability to better target its new products or services.
To be more specific, Search is a prime target for Facebook's near term and long term horizon… and you can be sure it has all intentions to enter it full force. The current search market is dominated by Google and for good reason. Google (GOOG) was not the first search engine, but it quickly became one of the best. It has conquered the search market because it was able to provide the most relevant search results to its users thanks to its targeting algorithms. Facebook, however, owns much more targeting data and as such can potentially provide much better search results as compared to Google. To illustrate this point, if Facebook knows I like classical music, when I perform a search on Facebook using a generic keyword like "music" the results returned will immediately contain links to "classical music" sites due to the fact that Facebook already knows my areas of interests. The above example is a simple one, however advanced data targeting can be applied in too many cases to list and happens to be extremely lucrative when applied to the Search Advertising market.
Right now the majority of Google's revenues can be attributed specifically to its search engine product. If Facebook were to launch a viable search product with better targeting than Google (and it has all it needs to succeed in such an endeavor), it is fair to assume that it will very likely be able to generate revenue numbers from search related advertising that can rival those of Google. Let's be pessimistic in our outlook and discount the 3 major search related variables of Facebook's new search business when comparing them to Google:
1. Facebook's Revenue Per Click will be ½ of Google
2. Search Numbers will be ½ of Google (since Google offers other products such as youtube, gmail, etc..)
3. Clickthrough rates (clicks / searches) will be ½ of Google's
Accordingly we are valuing Facebook's Search business at 1/8 the value of Google. Google's market cap at the end of October 1, 2012 is 249 billion dollars, which would make Facebook Search business valued at 249/8 = a bit over 30 billion dollars. Currently as of October 1, 2012 Facebook market cap clocks in at 47 billion dollars, subtract cash on hand and Facebook's market cap drops below the $40 billion dollar mark. Now let's not forget Facebook is also entering / aggressively expanding into other markets such as Commerce, currently dominated by Amazon (AMZN), and Payments, currently dominated by eBay's (EBAY) Paypal unit. This means that right now investors are valuing potential Facebook Search Business at a significant discount, since it can easily expand Facebook's current market cap by 75%.
While many people will speculate that Facebook search will not become that popular, nor will it create real competition for Google, current numbers are painting a very different picture. In fact, as mentioned by Facebook's CEO Mark Zuckerberg, Facebook is already generating over a billion searches per day, and that's even without having an actual search product. Just imagine what will happen once Facebook introduces a search product that is more targeted than Google's!