What Facebook Is Really Worth

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Shafiel Karim
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By Brandon Hunter, Jesse Fischer, and Shafiel Karim

Introduction

Facebook, Inc. (NASDAQ: FB) is the largest online social network in the world and currently boasts over 901 million unique monthly active users ("MAU"), over 500 million daily active users ("DAU"), and more than 125 billion user connections. Users upload over 300 million photographs every day and approximately 750 million photographs each weekend. And users click the "Like" button over 3.2 billion times daily, which allows Facebook to track the products and services its users prefer. Moreover, the Facebook platform is used for over seven million third party applications and is one of the largest online display advertisers in the world. In short, the Facebook social network is one of the "stickiest" and most popular websites in the world. (Click here for the company's amended SEC S-1 filing.)

Despite the fact that the company is expected to miss its Q2 revenue and profit estimates, its IPO is expected to value the company close to $100 billion. We believe such valuations exaggerate Facebook's ability to sustainably grow its user base and revenue. Instead, our valuation models and revenue forecasts value Facebook at much less than $100 billion. So, the $64,000 question remains: What is Facebook, Inc. really worth?

To begin answering the question, we need to understand how Facebook earns revenue and ultimately profits. Facebook earns revenues in two ways: (1) display advertising on its website and (2) royalties from third-party software developers that create original content for its platform. Unlike Google (NASDAQ: GOOG), the company's largest and fiercest competitor, Facebook claims it has positioned itself as a demand generator instead of a demand fulfiller. The premise is that when users search for a particular good or service on Google, its search algorithms display relevant advertisements to the user, which effectively fulfills that user's

This article was written by

Shafiel Karim profile picture
6 Followers
Brandon Hunter is an M.A. candidate in Politics, Economics, and Business at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at the Claremont Colleges. Brandon earned a B.S. from California State University, Fullerton. Jesse Fischer is an M.B.A candidate at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at the Claremont Colleges. Jesse earned an M.A. in Economics from Claremont Graduate University and a B.A. in Economics from Bradley University. Shafiel Karim is a J.D./M.B.A. candidate at Southwestern University School of Law and the Peter F. Drucker and Masatoshi Ito Graduate School of Management at the Claremont Colleges. Shafiel earned a B.A. from California State University, Fullerton and an M.A. from California State University, Long Beach.

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