Facebook Valuation Rumors: Two Key Questions

This week, tech insiders and observers joined in on a new round of the industry’s current favorite parlor game: bandying around estimates of how much Facebook is really worth.

What set off the latest buzz was a Sunday morning Wall Street Journal report that Facebook could hold its initial public offering at a valuation of $100 billion. The number came from unnamed company insiders, who arrived at it based on the $2 billion in annual earnings before interest, taxes, debt and amortization (EBITDA) they say Facebook is set to make in 2011.

There’s a lot being said about this, but to me, two particularly salient points stand out from the chatter:

  • Consider the (potential) source.

Skeptics have noted that the WSJ report’s sources could well have some skin in the game. After all, the WSJ article comes just days after an April 27 Reuters report that a group of Facebook shareholders are attempting to sell $1 billion worth of company shares in a secondary market at a price that values the entire company at $70 billion. Those same shareholders had previously tried in vain to offload their Facebook holdings at a price that valued the company at $90 billion, according to the Reuters report, which cited five unnamed sources claiming direct knowledge of the situation.

Could it be that people who are reportedly shopping around their Facebook stock are the same ones talking up Facebook’s valuation to the press?

  • That’s one ambitious valuation!

Even if the $2 billion EBITDA figure is completely accurate, does it make sense to extrapolate a $100 billion valuation from that?  As USA Today‘s Tim Mullaney points out, while a few firms like Salesforce (s CRM) and OpenTable (s OPEN) are currently trading at around 50 times EBITDA, most tech industry players are traded at much lower EBITDA multiples. Google (s GOOG) is currently valued at 9 times EBITDA, and Apple (s AAPL) is valued at 10 times EBITDA. Part of the beauty of the stock market is the mystery of market capitalizations, but valuing Facebook at 50 times EBITDA would place it at the far end of the Bell curve.

From a revenue, talent, and a customer traction perspective, there is no doubt that Facebook is in the big leagues. But until the company pulls the trigger on an IPO or sale, whether it will all translate into a $100 billion valuation is up for debate.