Here is a post that has been sitting in my drafts for a while (I am even embarrassed to say how long). Even though, re-reading it now, I think it is still relevant.
Since Microsoft bought a minority share in Facebook (FB), the later refuses to leave the news pages. Actually, i personally was surprised by the 15 billion evaluation of a network that has a rather fuzzy product. Unfortunately i was (and still am) stuck with school tasks, so i didn’t have the time to play with the numbers myself. Fortunately there are people out there with more time, who did the excercize.
As i suspected, the 15 billion figure is indeed appears blown out of proportion. Jesse Chan of FisTrain has a detailed explanation that leads him to estimate FB’s annual earnings in 2007 at US $47.7 million, which in turn gives Facebook a price-to-earnings (P/E) ratio of 316. In other words, Microsoft paid US $316 for each US $1 of earnings of Facebook. For comparison, General Electric’s P/E in the last 12 month was about 18.5, General Motors’ 11.23, Google’s (which i think is still high) was 58.21, and Amazon’s (even higher) 102.21.
Of course, we can assume that the company is going to grow tremendously in the future. For example, at the end of 2007 FB launched “FB Pages” that will allow local businesses and brands to have their own pages. Users will be supposed to interact with those pages, contributing to viral marketing and sharing their demographics. In other words it moves towards the mainstream, marketing-oriented media activity (an further away from its potential educational promises), which suggests better profitability. However, according to Chan, even if FB will generate US $200 million in net income in 2008 (four times more compared to 2007) , its P/E ratio will still be at 75, which in my view is very high.
My point is that FB is an example that has too much resemblance with the spirits of late 1990’s when we worked with multipliers of 400 and 600. Of course some lessons have been learned and the advertising models online are more sophisticated compared to what we saw in the year 2000. However, the remaining question is if the advertising industry capable of supporting an entire other industry that is producing nothing but detailed demographics while being expected to grow 3 and 4 times a year.