Why Facebook Clearly Belongs in the 10X Revenue Club. February 1, 2012: Attached are my thoughts on the Facebook S-1 along with some quick stabs at valuation.
Brief disclosure, Benchmark Capital has a minority position in Facebook as a result of the acquisition of FriendFeed, a company that was incubated in our offices. I thought it would be useful to look at Facebook using the scorecard from our May 24 blog post, “All Revenue is Not Created Equal, the Keys to the 10X Revenue Club.” For those that want to save time, the key point of this piece is that there is a broad disparity of Price/Revenue multiples for global Internet stocks, and that only a very small fraction of these companies achieve a multiple over 10X. We also created a list of 10 factors that public investors consider when trying to qualify if a company is deserved of such a prestigious and lofty valuation. On a roll, these factors are: 1. So how does Facebook score on these metrics?
The bottom line is that these scores are fantastic. Tax Rate. All Revenue is Not Created Equal: The Keys to the 10X Revenue Club. May 24, 2011: May 24, 2011: [Follow Me on Twitter] “ Don’t you know that you are a shooting star,And all the world will love you just as long,As long as you are.
. ” – Paul Rodgers, Shooting Star With the IPO market now blown wide-open, and the media completely infatuated with frothy trades in the bubbly late stage private market, it is common to see articles that reference both “valuation” and “revenue” and suggest that there is a correlation between the two. What drives true equity value? Because of the difficulty of getting DCF right, investors commonly use a handful of other shortcuts to determine valuations. The following chart highlights 2012 forward price/revenue ratios for 122 global Internet stocks.
Before we talk about why there is such disparity, it is important to highlight a few more points. What causes such a wide dispersion of price/revenue multiples? 1. If high price/revenue multiple companies have wide moats or strong barriers to entry, then the opposite is also true. 2. Beware the Facebook/Twitter/ Zynga/Pandora/HuffPo bubble!
The revelation that JPMorgan Chase is planning a dedicated fund to invest in social media companies on behalf of its wealthy clients is the loudest announcement yet that the third (fourth?)
Internet bubble is in full swing. Every day, it seems, another Web company files papers for an initial public offering, and every day the chatter about possible valuations reaches new levels of absurdity. Because it's going to get pretty noisy around here soon, what with all the people trying to trample those in front of them in line to get their hands on some stock in tomorrow, I've put together a quick cheat-sheet for just how you might go about thinking about which companies you want a piece of.
If, that is, you can even get your hands on them at all. Companies that make a product that's fun to use, but have never earned a dime from me and probably never will. Members: Facebook, Twitter, and Pandora. Let's do some simple math here, folks. Don't get me wrong. Members: Groupon, LinkedIn Members: Zynga.