As I posted earlier today, there was a face-off between Google Inc. (NASDAQ: GOOG) and Microsoft Corp. (NASDAQ: MSFT) for a stake in Facebook and Microsoft won.
Specifically, Microsoft paid $240 million for a 1.6% stake in Facebook. This values Facebook's equity at $15 billion -- that's $100 for every one of the $150 million in revenue it's expected to generate in 2007. CEO and Harvard dropout Mark Zuckerberg's 20% stake is now worth $3 billion.
But the really stunning thing about Facebook's valuation is how it compares to Microsoft's and Google's. Specifically, $1 of Facebook's sales is worth 7.1 times more than a dollar of Google's -- whose Price/Sales (P/S) ratio is 14.1 -- and 17.5 times that of Microsoft which sports a P/S ratio of 5.7.
The beauty of private company math is that even though Facebook can't really be worth that much, the bidding between these two powerhouses makes it so. And it looks like the old school Harvard ties paid off (that's where Gates dropped out and Ballmer graduated). And whether Microsoft earns any revenue on its advertising deal, I'd be willing to bet that Microsoft's 1.6% stake will more than double today's $240 million when Facebook goes public.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Google or Microsoft.
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Reader Comments (Page 1 of 1)
10-24-2007 @ 10:24PM
Todd said...
"And whether Microsoft earns any revenue on its advertising deal, I'd be willing to bet that Microsoft's 1.6% stake will more than double today's $240 million when Facebook goes public."
So you're speculating that Facebook will go public at a $30B valuation, even if it doesn't generate any meaningful revenue for its exclusive advertising partner? Highly doubtful.
Public markets may not be immune to hype, but even in your post you highlight the absurdity of private company math, and the clear cause of FB's hyper-valuation (bidding war). But in the very end you posit that this private company math will carry over into public markets? Unlikely.
FB is going to have to grow into its valuation if it ever wants to realize $15B in the public markets, let alone $30B.
Granted, FB's gross margins may be a bit higher than Google's, since FB commands the eyeballs and doesn't pay TAC to partners, but even generously granting that one FB dollar of revenue is worth $2 of Google's, it's hard to justify more than a $3-4 B valuation. Not bad, by any means, but not $15B!
10-25-2007 @ 12:27AM
Dave said...
I can explain this phenomena by what I call the "Sexy Quotient", if investors perceive the company as cool or innovative (eg Apple) then its revenue is subject to what is known as a "Sexy Quotient".
When comparing stocks the stock with the lowest value associated to its revenue has a "Sexy Quotient" of 1. In this case Google is 1 and FB is 7.1, or Microsoft is 1, Google is 2.46 and FB is 17.5. Just imagine if you added IBM to the mix. I really don't understand why IBM's revenue is worth so little. IBM brings in tonnes more revenue and profit than Apple lets say but Apple has a higher Market Cap. WHY??? It must be the "Sexy Quotient".
10-25-2007 @ 1:27AM
BizIntel said...
These are good points, but remember that Microsoft has the cash to do some speculation in this space. As I commented in a post yesterday:
http://www.evaluatingstocks.com/2007/10/24/microsoft-seals-facebook-deal/
I believe the move will allow Microsoft to finally gain some traction in the online ad space. Of course, they are paying for the "eyeballs", but they are also paying for the quality of user data and the user experience. To grow, especially when you are as big as MSFT, you have to make some bets (even when the valuations are a bit rich).