The social network is expected to go public Friday at a valuation of around $100 billion. Should Mark Zuckerberg find a way to multiply that value by 10 in the coming years, it would have a value higher than the GDP of all but 17 countries.
The grandiosity of the goal has has not, however, stopped Facebook from reportedly telling its new employees that it aims to be the first company to reach the milestone. Facebook’s high-level employees are fond of saying it is “1% finished,” and, according to a Facebook representative who lead a recent tour of the headquarters, the phrase is one of Mark Zuckerberg’s favorites.
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To put it in the words of technology analyst and Enderle Group president Rob Enderle:
“It’s not probable, but it’s possible.”
How It’s Possible
Facebook brought in $3.7 billion in revenue last year. It is valued at around $100 billion — 27 times that revenue.
In theory, if this multiple were to remain constant, Facebook would need to bring in $37 billion in order to reach a $1 trillion valuation. Let’s say Facebook somehow managed to continue the 120% annual revenue growth it has experienced on average over the last two years. It would hit $37 billion at some point in 2014.
But by at least one analyst’s watch, that puts it neck-and-neck with Apple. Piper Jaffray analyst Gene Munster predicted in April that Apple shares will reach $1,000 — pushing the company over the $1 trillion valuation mark — in 2014.
To be first, Facebook would have to grow revenues even faster than it has in the past.
The most likely source of this growth would be advertising. Facebook, which depends on advertisers for 85% of its income, announced a new suite of advertising products in February. Meanwhile, a report from BIA/Kelsey released earlier this week predicts social media ad spending will grow from about $3.8 billion in 2011 to $9.8 billion in 2016.
“Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results,” the company wrote in its IPO filing.
Cracking this problem, however, could open up a new growth area. In any case, as an Internet communication company, rather than a hardware company, Facebook has a huge advantage over Apple in increasing its growth rate.
“You don’t have the distribution problem, you don’t have the manufacturing problems, you don’t have problems that typically limit growth,” says Enderle. “Facebook’s limits are simply the speed at which it can grasp a particular group.”
Why It’s Unlikely
Facebook is not being valued at $100 billion because of its income. If income were the basis, Enderle estimates the company would more likely be valued at around $40 billion. Facebook’s pre-IPO valuation is hinging on the expectation of demand for stock — In other words, it’s a bet on Facebook’s future.
To trade and continue trading at 27 times its revenue, Facebook would need to continue looking like a good growth bet.
Current trends, however, suggest its growth may be leveling. Facebook increased its monthly active userbase by 118% between March 2009 and March 2010. Between 2010 and 2011, it increased by just 43%. And last year, it increased it by even less: 33%. Such is a common plight of the graduating startup.
The other 15% of Facebook’s income comes from apps like Zynga games. In 2010, Facebook mandated all games that run on its platform to use its currency, which guarantees it a 30% cut of all purchases. Zynga, which generates 12% of Facebook’s revenue, agreed to abide by the new policy.
But that agreement expires in 2015.
Facebook also faces more competitors than it did in its early years. Twitter and Facebook have evolved to compete with each other; search advertising giant Google has launched a social product; and new social sites such as Pinterest are getting attention from mainstream audiences for the first time.
One of the worst things Facebook could do for its prospects of hitting a $1 trillion valuation, Enderle says, is to promise anybody a $1 trillion valuation.
“If Facebook were to focus on becoming a $1 trillion company, they probably won’t make it,” he says. “You over-set expectations. If employees are led to believe it will be a $1 trillion company, and if investors are led to believe it will be a $1 trillion company, and if Facebook only triples itself, in the eyes of those people it will have failed.
“That would be a textbook mistake.”
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