Facebook’s prosperity will grow exponentially with the initial public offering – Part 2

But let’s do a little more math. In calendar 2011 – not their September fiscal year – Apple had revenue of $127.8 billion, and profits of $33 billion. Ergo, the company is trading at 3.4x trailing revenues, and 13x trailing profits. Back out the $100 billion or so Apple now has in cash, and the valuation drops to 2.6x revenues, and 10x revenues.

So, then, the question investors will have to ask themselves is this: is a dollar of revenue or profits from Facebook really 10x more valuable than a dollar of profits from Apple? Is it necessarily the case that investors will generate a better return betting on the longevity of the social network than on the continued rapid growth of Apple’s footprint in the digital world?

And sure, investors don’t really have to make that specific choice; they can buy both, after all. But the comparison does underline the uphill battle Facebook investors will face. If the company goes public with a $100 billion market cap, what will it take for the value to double to $200 billion? There are, after all, less than 20 companies with a valuation that high. At $200 billion, the company would shoot past AT&T, Procter & Gamble and Johnson & Johnson, and put the company roughly on par with General Electric, or Google, or Berkshire Hathaway. (Apple, in effect, faces the same conundrum, by the way; were it to double, the company’s market cap would be pushing $1 trillion.)

Anyway, Let’s say that Facebook can get membership from 850 million to 2 billion – a quarter of the Earth’s population. And let’s say the company can roughly triple its annual revenue per subscriber from last year’s $4.39 to $12 per user per year – a buck a month from a recent 37 cents. That would mean revenue of $24 billion, which would be an impressive total indeed. And let’s say that the company can hang on to last year’s level of profitability – 27% net margins – which would mean profits of $6.5 billion. At that level, at a $200 billion market cap, you would still be paying a not insignificant 30x earnings. And reaching those theoretical levels is likely years away.

The point here is simply this: Facebook shares are going to be pricey. No question that the company is going to keep growing. Before you decide to make the leap, though, be sure you have a realistic idea on what that growth is worth.

Short URL: https://www.newspakistan.pk/?p=11826

Posted by Usman Khalid on Feb 6 2012. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.