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Posted at 12:27 PM ET, 01/31/2012

The Facebook IPO pricetag and why young tech CEOs should be rooting for Zuckerberg

Facebook’s much-anticipated IPO filing comes after months of speculation about what will almost certainly be the biggest Internet offering ever.

It also comes at a time when there is increasing urgency to get the deal done before European economic headwinds or any political wildcards from the 2012 election create volatility in U.S. financial markets. The conventional wisdom is that Facebook is worth a cool $100 billion today, which means that if the company decides to offer 10 percent of its shares on the stock market, it would raise an astounding $10 billion from investors.

The $100 billion figure is obviously based on a few back-of-the-envelope calculations. On Wall Street, the money men and women like to think in terms of nice, fat round numbers. And make no mistake, the more money Facebook raises in the capital markets when it goes public, the more money in fees Wall Street bankers can collect from Zuckerberg & Co.

But it’s also necessary to put that $100 billion figure into perspective. When Google went public back in 2004, it raised $1.9 billion from investors and only had a valuation of $23 billion. Flash forward eight years, and Google is now worth $185 billion, meaning that an investment in Google when it went public would have multiplied nearly tenfold in less than a decade.

There are, of course, as many different ways to value Facebook as there are investment analysts on Wall Street. Already, the $100 billion valuation has been chipped down to $85 billion and then down to $75 billion. Until Facebook files for its IPO, we only have a few rough yardsticks by which to value Facebook: 800 million users worldwide, revenue of $4 billion annually and annual operating income of $2 billion. The beauty of being a private company is that you can trot out a few numbers — like that awe-inspiring 800 million users — and not worry about all the other details.

That’s where Wall Street comes in.

Wall Street is extraordinarily good at figuring out how you make money — as opposed to how you say you make money — and then applying a coldly rational analysis as to valuation.


The Google logo at the Google headquarters in Brussels. (Virginia Mayo - AP)
One way to value Facebook is to take a “comp” — comparable company — and use that company as a proxy. For now, Facebook appears to make the lion’s share of its revenue via advertising, so a comparable company might be a media company. The argument that Facebook plans to make its money by advertising is obviously not what Wall Street really wants to hear. Advertising and page views have a way of drying up over time, just ask any media mogul.

What Wall Street wants to hear is that you have a model for “monetizing” each and every one of those 800 million users. Consider that the average person spends an average of between 7 and 8 hours on Facebook per month. The site, in Web parlance, is “sticky.” With its new Timeline Apps, Facebook has made the site even “sticker.” For bankers, the real future of Facebook is not advertising but the ability to leverage apps and gaming platforms for revenue. Just as cable companies are valued at a dollar value per subscriber, Facebook needs to convince Wall Street that it can monetize its user base through games like Farmville on a consistent basis.

If Facebook can convince Wall Street of this, it may be worth well more than $100 billion — just as Google wound up being worth well more than its initial $23 billion investment. Whatever the final Facebook IPO valuation, there will definitely be consequences for other companies, such as Twitter, looking to go public soon. The Facebook IPO will become the new standard for other Internet players trying to go public before the IPO window slams shut. If you’re a young Internet CEO — even if you’re directly competing with Zuckerberg — it might be worth it to wish for a big Facebook IPO this spring.

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By  |  12:27 PM ET, 01/31/2012

Categories:  Business, Dominic Basulto, Technology

 
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