Is Facebook worth $34BN ? Reverse engineering their valuation. 
I wrote the below quickly, and a friend pointed out a HUGE mistake I made in haste… the 10:1 google number is alleged to be an earnings ratio, and I based my numbers on revenue. For those that don’t know the difference, a simplified description is: Earnings = Net/Profit; Revenue = Gross/Income.
So the math below is 100% wrong.
Reports came out that Facebook is worth $34BN, up from a previous valuation that pegged it at $20BN.
My first look at this, is that its a drastic overvaluing. Facebook is looking at $1BN in revenue this year, giving it at 34:1 earnings ratio for valuation. That not only looks quite high itself, but Google’s ratio at the time of its IPO was about 10:1.
Some friends have tied this number to growth – but I don’t believe in that argument.
Facebook’s sales haven’t been growing, and its product portfolio hasn’t been growing either — its just a social platform. Google diversified into dozens of monetized verticals, Facebook has only introduced their API.
While its true that Facebook’s userbase is growing, and they have a complete lock on the market at 500MM users, that’s only showing that they have a great product — not that they’re monetizing it well, or are capable of doing so.
In fact, Facebook’s monetization based on users is pretty low — $1,000MM across 500MM users is only $2 per user per year.
A combination of Google’s 10:1 earnings ratio at IPO and this low per-user revenue metric might be how Facebook’s 34BN market valuation was created. Despite being dwarfed by Facebook in users with only 67MM unique users, MySpace has been projected to close 2010 with about $400MM in revenue — or about $6 in revenue per user. If Facebook were to triple its per-user revenue to match MySpace’s performance, $6 user * 550MM users = $3.3MM — which, at a 10:1 ratio like Google’s IPO would come out to 33BN. I’m using slightly out-of-date statistics, so an extra $1BN in error could easily happen.
Having been involved with startups for several years, I can say from experience that this is pretty much in line with the types of comparisons people bring up when claiming a value — and my numbers sort-of match up — so I wouldn’t be surprised if this was how the valuation happened.