If you look really hard at the numbers Facebook is worth ‘just’ $21bn (not $104bn)

According to the business press, Wall Street is full of recriminations over the Facebook IPO. Morgan Stanley, the lead underwriter, allegedly ignored downward revisions of forecasts from its own analysts during the roadshow pre-IPO. The top securities regulator in Massachusetts has issued a subpoena to Morgan Stanley as part of an investigation in to FB’s IPO.

To add to the woes a group of investors has issued a class-action lawsuit, filed in a Manhattan court, alleging that FB revenues were revised down and were not disclosed to all investors. The writ names Facebook, Mark Zuckerberg and the banks involved.

At close yesterday FB’s stock had further falls to $31, an 18.4 per cent fall since last Friday or, in real money, a reduction of $19.1 billion in value – gulp. The issue for investors now now must be whether to sell, take the hit before the stock goes down further or stay in for the long ride. The gamble now must be on future market announcements on the progress of FB.

Based on current facts, and without any knowledge of FB’s forward plans, the multiple on 2011 profit after tax allowance* is 84+ (based on yesterday’s stock price or 104 based on the offer price), Google stock trades around a multiple of 16. So to get to a ‘sensible’ multiple of, say, 20 FB needs to either increase earnings to $4+ billion from $1 billion today, or the stock price needs to fall to $7.60, leading to a market cap of just $21 billion.

Blimey. These are massive variances so I must believe people much smarter than me have a far better handle on the maths.

The range of valuations are $104 billion based on the IPO offer price, $33 billion based on the latest BrandZ report and $21 billion based on the Paul Simons Casio calculator (using 2011 numbers). So somewhere between $21 and $104 billion lies the settled market cap of Facebook!

The media comment (including this) suggests a big confidence gap between the heady offer price and the reality; as an observer I would suggest the weak part of FB’s armoury is managing the wider world.

For anyone immersed in this week’s iStrategy London 2012 conference being held down at Chelsea football club it is easy to believe the world of social media is the only future. The two days are packed with a wide range of experts presenting their views on a wide range of topics and FB gets its fair share of mentions.

The problem, as I see it, is finding an easy fix. I wonder if FB is in denial? If you read founder and boss Mark Zuckerberg’s letter in the IPO filing it is highly visionary, revolving around interpersonal relationships, a kind of mantra one either gets or doesn’t, as the case may be. I found it philosophically very interesting but I had no way of relating the views in it to any commercial construct.

So it seems to me there are two basic groups of people; those who are fanatical about social media and absorb every minute detail and those who just regard it as another part of our lives, alongside work, shopping, paying bills and generally getting on with life.

The latter group is much bigger than the former so the reality is getting the ‘take it or leave it’ group to buy in to FB’s future, if stock market performance is important for them. Looking at Apple as a technology-driven business, rated as the most valuable in the world (see BrandZ), it has a far greater brand presence than the number of users of its products.

This is a result of exemplary brand management from the very top of the organisation. On a sample of one I only have an iPod, not other Apple products, but I’m a big fan of the brand and regard it as a world class operation.

Facebook needs similar brand management from the top of the company. It’s all about confidence. Millions of people invest in companies who make products they don’t use personally, Rolls-Royce engines for example, but still have a high regard for the companies concerned. Reputation and track record are key to sustaining returns to investors over a long period of time. Communicating to the outside world is essential.

Given Facebook’s core reason for being is interpersonal communication, they are in danger of the cliche of ‘do as I say, not as I do.’ I’m not suggesting better marketing will get the numbers to balance but I suspect it would be a good start.

There must be a lot of people nursing their positions in Facebook hoping for something to happen that creates an upwards correction.
*Example of well-known companies’ p/e ratios:
WPP 11.3, Aegis 19.2, HSBC 8.6, Unilever 16, BP 5.3, GlaxoSmithKline 14.6, M&S 9.7
N.B. Multiples and p/e ratios are not strictly the same but they are close enough for rock and roll.

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About Paul Simons

Paul joined Cadbury-Schweppes in brand management and then moved to United Biscuits. He switched to advertising in his late 20s, at Cogent Elliott and then Gold Greenlees Trott. He founded Simons Palmer Denton Clemmow & Johnson in the late 80s, one of the leading creative agencies of the 90s. Simons Palmer then merged with TBWA to create a top ten agency. Paul then joined O&M as chairman & CEO of the UK group. After three years he left to create a new AIM-quoted advertising group Cagney Plc. He is now a consultant to a number of client companies. Paul also shares his thoughts on his blog. Visit Paul Simons Blog.