Think Facebook’s $100 Billion Valuation Is Nuts? Read This
We’re all awaiting with bated breath for the Facebook S-1 to drop this week. According to various leaks, Facebook’s operating profit was around $1.5 billion in 2011 and its revenues were something like $4 billion. We’ll know soon enough whether that’s true, but if so, it makes Facebook’s reported $85-100 billion valuation sound insane.Is it? Well, anyone can argue that it’s high. But we don’t think it’s insane. First of all, the value of an asset is the net present value of its future cashflows. This means that a company’s value doesn’t depend on how much revenue it generates today, but on the profits it’s going to generate in the future. The value of the current financials is in helping someone figure out what are going to be the future financials. That’s more of an art than a science, obviously. But we have to remember that assessing whether a valuation is insane is about assessing the future of an asset. So, what’s Facebook’s future like? It’s very bright.