Billion Dollar Book

Aaron Sorkin’s ‘The Social Network’ is what I would describe as a very well constructed film. It doesn’t have edge-of-your-seat action or thigh-slapping comedy – how could it? it’s a story about a website. But it is an engaging and fascinating look at a business idea so brilliant, it seems painfully obvious with hindsight.

The movie left me with a couple of interesting things to ponder. The first is the perfect irony that Mark Zuckerberg, someone extremely socially inept (at least from Sorkin’s portrayal of him), could invent a tool responsible for connecting and re-connecting so many people around the world.

I experienced this first-hand recently, when a German friend I had met while he was in Australia studying came to visit. We had lost contact quite a few years ago and the chances of getting back in contact were very slim. Of course, Facebook came along and made this reconnection quite easy. For that Mark Zuckerberg, I genuinely thank you!

The second point of interest is that the film quotes Facebook’s estimated value at around $25 billion dollars. Other sources since suggest it could be around $35-40 billion, or even as high as $50 billion. I found this quite surprising on the surface, but when you think about who else but Google or YouTube has more people looking at it each day?

That number of people has increased from 140 million in 2008 to over 500 million currently. With 310 million people in the United States, it dwarfs any single TV channel viewership and is 5 times higher than the most viewed show ever in the US – the 2010 Superbowl. The only television event with more viewers is the Football World Cup, which had over 700 million for the 2010 final.

Moving back to the estimated value, it got me thinking about where Facebook sits in comparison to stocks currently listed in the USA. While not a completely apples with apples approach, I sat down and compared its estimated value to the Market Capitalization of the larger US stocks using Integrated Investor. Market Cap is calculated by multiplying a company’s share price by the number of shares it has on issue, giving a theoretical current value. I was interested to discover that Facebook is supposedly worth more than Yahoo, which currently comes in at $21 billion.

Table 1 shows the top 5 stocks traded in the US by Market Cap. Using a market cap of $35 billion, Facebook would currently be in the top 200 biggest stocks traded on US exchanges.

Now obviously Facebook is still a long way off stocks like AAPL and Exxon, but its growth really is phenomenal when you think of it in terms of a business founded in 2004 from a University dorm. That businesses’ executives estimate Facebook’s 2010 revenue could be as high as $1.2 to $2 Billion, which does offer support to the valuations being labelled high in some quarters.

On that note, there are suggestions that the website is more realistically worth between $8-10 billion. Questions are also being raised about its ability to continue its current growth rates and how it can effectively turn its large user base into dollars, considering most internet users don’t respond well to banner-style advertising.

Supporters of the higher valuations however, say that while Facebook has less users than Google each day, users spend longer on Facebook, giving it a larger total time spent. It is also claimed that the social network is now responsible for more traffic to sites like MSN and Yahoo than Google. For the Facebook users among us, who has clicked a link on a friend’s wall or status update? Thinking in those terms you can see why some are suggesting Facebook can become a $100 billion company in the future.

Whether Facebook continues Google like growth or fades like Yahoo, its IPO is now possibly the most anticipated of all time.

Happy trading

Jordan Craw