Facebook IPO vs Ford (real world) Valuation Comparison

Facebook IPO

About 10 minutes ago (as I start writing this blog post at least) investors were able to buy into Facebook.  At opening the price was estimated at $38/share which gives Facebook an overall value of $107 billion.  Wait … let me say that again.  That’s one hundred and seven BILLION dollars (insert into your brains if you will an image of Dr. Evil laughing).

So, what’s obvious is that money in the real world has no connection to money in the tech realm.  Here’s just a few statistics about Facebook:

Q1 revenue – $1.058 billion
Q1 net earnings – $205 million
Members – 835,525,280

So let’s think about this for just a second.  This means that each member is worth $128.06 if things go Facebook’s way and the value at the end of the day reaches $107 billion.  Now if we look at what they earned from their members in Q1 (and I’m talking about profit here, not revenue) they earned $0.25 off each one in the quarter.  Essentially this means that at the current rate they’ll make roughly $1 off each user per year so simple math tells us that the company is being valued at 128 years of profit.  That’s right … 128 years.

Now let’s take a different approach in valuation and look at it from revenue instead of profit.  You shouldn’t … but lets.  If Facebook’s Q1 earnings hold through the rest of the year that would give them an annual revenue of $4.232 billion but let’s be nice, let’s say that over Q3 and 4 their revenue spikes for the holidays and they earn a cool $5 billion; they’re still being valued at 21.4 years of revenue.  Not profit … revenue.

The Real World

So let’s put this in real world terms.  Let’s look at the valuation of a brick-and-mortar company, a little company called Ford.  Here’s their statistics:

Q1 revenue – $30.5 billion
Q1 net earnings – $1.4 billion
Members – NA

So, with the math noted above on Facebook’s evaluation Ford is worth 2.6108 trillion dollars (note: this is higher than the total US deficit for 2011).

So what is Ford worth?  $38.34 billion.  You heard me … the value of a company that shows over a billion dollars in real-world profit each quarter and generates $30.5 billion in revenue in a single quarter is valued at 1.257 times quarterly revenue or 27.39 times quarterly net earnings.

Let’s Do Some Math

As an SEO I love math so I won’t make you do it.  Let’s look at what Facebook should be valued at if the tech world was ruled by the same general laws of reality that the real world is.

If we base Facebook’s valuation on their Q1 revenue and subscribed to the notion that a company should be valued by some reasonable measure of what they earn (it’s crazy I know) and used Ford as the benchmark they would be valued at $1.33 billion dollars (that’s about $0.48 per share).  If we go the route of valuing them based on net earnings and use Ford again, they would be valued at $5.615 billion, a healthier $2.05 per share.

But Investors Are Apparently Detached …

from reality.  During just the time of my writing this blog post (about 30 minutes) share prices have gone from $38.00 (a low after opening at $45) back up to $41.16 valuing the company at $112.73 billion dollars.

Can anyone else see the pin coming that’s going to pop this bubble?


Update: 3 Hours Later …

Poor Facebook, back down at $38.01.  personally I think it’s not dropping below $38 simply because there’s noone who’ll sell for less right now.  Don’t worry, if you want to grab a deal on FB stocks just wait … they will go down once people get beaten down.

Other social media properties have been tanking throughout the day.  Some speculate that’s due to investors pulling their money out to buy Facebook shares.  Zynga (game maker, you’re probably familiar with many of their products … I for one am addicted to Words With Friends) dropped 16.2% as of the time of this writing.  But let’s take a look at their financials:

Q1 revenue – $321 million
Q1 net earnings – $47 million
Members – NA

Their company value is currently $1.425 billion.  If we assume Q1 revenue will continue (which is unlikely – Zynga is likely to increase in revenue in Q3 and Q4) their annual revenue would be $1.284 billion.  So what I’m seeing is investors valuing Facebook at over 21 times yearly revenue and bailing on Zynga to the point where the stock was frozen earlier today based on a multiplier of a virtually 1 to 1 annual revenue vs company valuation.  I think I’ll just go scratch my head and wonder at the state of the economy for a while.  While I’m doing that you can wonder at why companies like Zynga and LinkedIn are tanking.  Groupon is too (down 6.57% as of this writing) but that just makes sense to me as I viewed it as over-valued and then there’s that issue of unusually heavy trading just hours before a favorable earnings announcement (just a titch suspicious – you can read more on that on the Wall street Journal at http://online.wsj.com/article/SB10001424052702303879604577410503063634984.html).  Not so favorable (in my opinion) as to warrant their market value of over $7 billion ($559.3 million in Q1).

Note: I may find it overvalued however I do think their pricing is far more realistic than … say … Facebook.  But then, they actually provide a real-world deliverable so they can’t be worth as much right?