The big news this week is Facebook’s announcement that it would take the company public, in one of the largest offering in history, raising an expected US$5 billion in the process. As this is the largest tech IPO since Google, it is time to run the number and assess whether similarities or difference exist when it comes to base numbers. What appears there seems to justify the $75-100 billion valuation some see the company getting at IPO while providing a few points of concerns about the future growth of the company.
The topline numbers
The first numbers everyone is looking at are how much the company is raising, how much it’s making and what its profitability look like. If we compare the 12 months preceding the offering for Google and Facebook, the picture looks like this (all figures are in thousands of dollars, unless otherwise stated):
|Raising||US$2.7 billion||US$5 billion||1.84 times|
|Net Income||US$105,648||US$1,000,000||9.47 times|
Looking at those numbers, the Facebook IPO seems relatively cheap compared to the amount of money Google was looking to rise when it went public. However, since we don’t know how many shares Facebook is looking to sell for those US$5 billion, it is impossible to assess how much the company should be priced at.
Using Google’s market cap at its strike price and at the close of its first day, we could look at the multipliers for revenue and net income as possible hints as to how much Facebook could be valued at on its first day:
|Facebook potential value assuming 3.86 revenue multiplier|
|Based on Google’s US$23 billion market cap at IPO||US$88.78 billion|
|Based on Google’s US$27.1 billion market cap at 1st day market close||US$104.606 billion|
So if revenue and income were to be considered as the only indicators for what value to give Facebook, the valuation range of US$75-100 billion for the company doesn’t seem totally incredible. However, one would have to consider whether Facebook could grow its revenue at the same rate as Google did. While it starts from a substantially higher number, it also means that the company is probably in a more mature stage and may not be able to grow its revenue at the same speed as it has in the past.
While Facebook’s revenues are impressive, we should see how they break down in order to get a better sense as to whether a comparison to Google makes sense. Digging into the S-1, we find interesting numbers such as the percentage of revenue that comes from advertising, the percentage change from the prior year’s ad revenue (and from the year before that, giving us a sense of what growth looks like) and highlights as to the percentage of revenue coming from significant external parties. I’ve summarize this data in the table below (dollar values are in thousands):
|Advertising as % of all revenue||95%||85%|
|% change in ad revenue from previous year||+152%||+69%|
|% change in ad revenue from 2 years earlier||+359%||+145%|
|% revenue from US only in previous year||74%||56%|
|% revenue reliant on external parties||21%||12%|
While Facebook’s ad revenue are substantially larger than Google’s were at IPO time, its reliance on advertising is 10%, showing that the company may be more successful as diversifying its revenue base. This appears to be a good thing as the last 2 years of ad revenue growth seem to have been slower than what Google was experiencing when it went public. Another sign that we may be dealing with a more mature growth curve when it comes to the company’s ad revenue is the fact that it seems to have already been fairly successful in ensuring that its revenue base was no longer just a US one, with only 56% of its ad revenue coming from the US, while Google was deriving 74% of its advertising revenue from the US when it went public.
Much has been made about the mention in Facebook’s offering that it derived 12% of its revenue from deals with Zynga, the company that has successfully provided a number of games for the Facebook platform. However, one must realize that such reliance on an external party is not so unusual and that Google was warning that 21% of its ad revenue were generated by managing the ad inventory of external partners.
So all and all, the revenue picture for Facebook looks pretty strong but advertising revenue may be decelerating, with question as to whether the other sources of revenue are growing at high enough a speed to counter that deceleration.
On the other side of the financial register, one has to look at whether Facebook is as efficient on managing costs as Google was when it went public. Fortunately, here again, the S-1 filings provide us with usable data (all dollar figures in thousands):
|Cost of Revenue||US$121,794||US$860,000||7.06 times|
|Sales and Marketing||US$120,328||US$427,000||3.55 times|
|Research and Development||US$91,228||US$388,000||4.25 times|
|Total costs and expenses||US$619,410||US$1,955,000||3.16 times|
The first thing that jumps out when looking at those numbers is that Facebook seems to pay substantially more for its revenue than Google does. In fact, if you look at the multipliers on cost of revenue (7.06 times) and actual revenue (3.86 times), it seems that it takes almost twice as much for Facebook to make a dollar as it did for Google when it went public. Some of this has to do with R&D costs, which are substantially higher as a function of revenue than the ones Google had at IPO time. Sales and market and overall costs and expenses seem to be lower, as a function of revenue, than Google’s were at the time of its offering. This may be a sign of an organization with more mature cost control metrics.
Keeping an eye on the cost of revenue may be an important factor in assessing where Facebook is heading revenue wise. If that number keeps rising, the company’s margin may erode, making it a less attractive business. In its offering document, the company is reporting a US$.43 net income per diluted share: this is slightly better but mostly comparable to the US$.41 per share Google had reported in its offering documents.
How much revenue per employee?
Both filings provide information as to the number of employees each company had. When it filed to go public, Google had 1907 employees; by comparison, Facebook had 3200 as of its filing. This is a useful number as it allows us to compute revenue per employee, a common measure of how effective a company is. When it filed, Google was making US$504,391 per employee; by comparison, Facebook is making US$1,159,688 per employee.
This is pretty significant as Facebook appears to be making twice as much revenue per employee as Google does. But how profitable are each employee?
Using the same approach, we can find out that Google made US$55,400 in net income per employee when it filed while Facebook makes US$312,500 in net income per employee as of this filing. This is a pretty impressive number but it is in league with what Google makes today (US$336,297 as of a year ago) and ahead of the rest of the computer industry, with the exception of Apple and Google.
If we were to look at Facebook by this measure, it most definitely earns a spot in the US$100 billion market-cap club.
For the purpose of getting this data, I pulled all the numbers from the respective S-1 documents for Facebook and Google. Because the numbers in Google’s S-1 were in thousands and the numbers in Facebook’s S-1 were in millions, I have normalized all numbers to be in thousands. All numbers were pulled directly from the respective S-1 filings or computed from the numbers I’ve exposed.
I’ve looked at a number of ways to quantify how big Facebook is from a financial standpoint and compare it to what was the last IPO of this scale in the tech world. The Google IPO was the launch of a company that had been dominating a large part of the discussion in tech circles over the previous 5 years. The same is true of Facebook, which has managed to grow from a project in a Harvard dorm room into a company that is serving around 800 million people. From a metrics standpoints, this company also appears to have a very strong business that compares favorably with other tech giants and the numbers bandied about in terms of valuation do not seem to be particularly outrageous when put in the greater context of the rest of the industry.
Of course, this does not mean that it is a business that is guaranteed success in the future. Some questions still remain around the cost of its revenue and the company’s ability to continue on the same growth curve as it has in recent years.
If you were to ask me if the Facebook IPO represents a new level of froth in our industry, I would be tempted to say that, based on the core numbers, that does not appear to be the case.
Update (May 18th, 2012): Facebook priced and closed unchanged at $38, giving it a revenue multiplier roughly equivalent to that of Google’s first day close (Facebook was worth $104.18 billion at close). However, that price was supported by underwriters so it will probably end up lower on its second day of trading. My guess is that it will settle at a market cap between $88 and $104 billion, which would mean a share price between $32 and $38.