What is Facebook worth?

Collin Douma and I were on Twitter having a spirited debate on the valuation of Facebook.

Collin shared a link in which Business Insider purports Facebook will be worth $35-40bn when it goes public in 2011. I did the quick math, based on revenues of $1.5bn this year and deduced that that equals a PE (price: earnings) ratio of 26x…and that just accounts for earnings, not even profitability. I don’t think any investor, even taking into account future earnings and growth potential would look at a PE of more than 20x…Collin came back and challenged this with the following:

Collin Douma: If facebook charged $5 a month to subscribe, they would probably lose 100mm people, and still make $18bn a year

Ed Lee: (i think) fb would lose >25% of user base if they charged even $1 a year

Collin Douma: Even at $1/pa .. with ads, they’d still be making more than Ford, GM and Chrysler.– combined.

Collin Douma: What if they sold info for market research, election prediction, trend spotting, ad testing, etc… theres another $3-5B /pa

Collin Douma: If they opened their platform to currency exchange, p2p ecommerce etc, another coup’la $B.

Collin Douma: the real question is not the worth in 2011, it’s the worth in 2012 and beyond… that’s the watchout.

Collin makes some smart points and I, to remind you, am long on Facebook. But at a 26x multiple, I’m not that long. To put some perspective around this, even when a proven company with a solid revenue stream like Google had a P/E approaching 60x, investors were firmly in sell mode, waiting for the crash.

I completely agree that Facebook is one of the few “Web2.0” companies which will last but didn’t we think that about MySpace when it was sold to NewsCorp for some $580m…MySpace is still relevant but it has seemingly lost the zeitgeist. Will Facebook? In a world where fashion and trend plays a huge role, what happens if and when Facebook becomes unfashionable and a new trend emerges. Will investors still see a high P/E as being desirable? No, I’m far more comfortable with assigning a P/E of around 10-15 and valuing Facebook in the $15bn – $23bn range. Which about where the company is valued right now, as Mashable revealed through research with SharesPost, a company that lets owners of shares in private companies sell them to prospective buyers…who are clearly getting a discount as vested employees look to cash out early.

I’m far more comfortable living with the current market value than speculation. I’m sure Facebook will continue to lock-in more users (and businesses) and learn how to unlock more value. But I still think $40bn is unduly high and would not invest in the company at this valuation as its hard to see how I could make any money in the long term. As Warren Buffet says, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”

What do you think? How would you value Facebook?

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