The recent IPO of LinkedIn clearly illustrated the public’s infatuation with all things social. The company ultimately priced its IPO at $45 a share after raising the range due to high investor demand. Within its first day of trading the stock reached a high of $122.69 leaving the company with a market cap of $11.6B! The stock has retreated (closed at 75.91 on 6/8), but this still leaves the company with a remarkable $6.9B valuation. How can a company with ~$240M in annual revenue and operating profit of less than 20M be valued at such a level? Clearly the company is valued not on existing financial performance, but rather on the strength of its user base. If LinkedIn reaches such a valuation on its user base, what does this imply for Facebook when it ultimately goes public with a user base significantly larger than that of LinkedIn?
By creating a valuation algorithm based on online consumer behavior we are able to back into an implied future Facebook valuation. We know this is a simplistic exercise that does not take into account many other important factors when looking at the health of a business, but it is an interesting framework nonetheless. The valuation algorithm we will use is:
(Monthly Unique Visitors * (1+ Annual Growth in Unique Visitors) * (Average # of Monthly Visits Per Visitor + Average Time Spent Per Visit in Minutes).
This enables us to value LinkedIn on three particular parameters related to its user base – size, growth, and engagement. The combination of these three variables tells an overall story of the value of a user community that UVs alone cannot tell. By applying the algorithm to LinkedIn we see:
16.2M * (1+.2) * (3 + 6.9) = 192M. Thus, with a valuation of 6.9B we are left with a factor of 35.9 (6.9B/192M) that we will leave constant when analyzing Facebook. By applying this algorithm to Facebook we see:
138.0M * (1+.13) * (23 + 20.7) = 6.8B. After applying the factor of 35.9 we are left with an implied valuation of 244B! While this ultimately might be too high for a Facebook valuation, this exercise illustrates that if the frothy LinkedIn type valuations persist until Facebook taps the public markets we will see an IPO of unprecedented proportions. Facebook dwarfs LinkedIn in not only size of its user base, but in the deep level of engagement typified by its users. Facebook visitors come to the site on average 23 times a month compared to 3 for LinkedIn and spend 20.7 minutes per visit compared to 6.9 for LinkedIn. Definitely exciting times in the land of social media.