Last night, CNBC reported that General Atlantic, a $17 billion investment firm, bought a stake in Facebook with an implied valuation of $65 billion. We currently value Facebook at roughly $45 billion. Facebook competes with Google ( GOOG ), Yahoo ( YHOO ), Microsoft ( MSFT ), AOL ( AOL ) in the text and display advertising market as well as search advertising market. To explain a discrepancy in valuation we can look at sensitivities in our analysis that are most likely responsible for the higher valuation forecast.
Facebook currently has 3 revenue streams:
- Text & Display Ads on Facebook.com
- Facebook Credits for Games & Applications
- Search Advertising on Facebook.com
Furthermore, we expect that Facebook will generate revenues based on eCommerce in the future leveraging the Facebook Credits payments platform. Based on our analysis, we estimate that Facebook's $45 billion valuation breaks-up roughly as follows:
- Text & Display Ads: $27 billion (60%)
- Games & Applications: $8 billion (17%)
- eCommerce: $5 billion (11%)
- Search Advertising: $4 billion (8%)
The below scenarios would lead to upside to our current forecast and bring it roughly inline to the reported implied valuation.
1) Higher Revenue per Page View
We expect Facebook's revenue per page view (RPM) to decline from around $0.50 per 1,000 page views in 2009 to $0.49 per 1,000 page views by the end of Trefis forecast period.
Social networking sites are mostly used for communication rather than seeking information on products and services. This explains Facebook's low RPM historically compared to other sites like Yahoo and AOL. Yahoo's RPM presently is around $1 per 1,000 page views and we expect it to increase to around $1.40 per 1,000 page views. However, there could be an upside of about 10% to the $45 billion valuation for Facebook if its RPM increases to $0.60 per 1,000 page views by the end of Trefis forecast period, instead of the decline that we forecast.
This driver alone would get us to a $50 billion valuation. You can drag the trend line in this chart to see the impact.
2) Page Views Increase Higher Than Expected
We expect page views per user to increase from around 390 per month to 470 per month by the end of Trefis forecast period. This implies that users are checking out Facebook more on mobile phones and checking out videos, news and friends' updates on Facebook. This basically implies that Facebook becomes a bigger part of our every day lives and becomes more of a tool and resource for information rather than just a way to socialize with friends. If this grows to 500 views per month, or roughly 16 views a day (!), this will chip in to additional upside.
3) Revenue per Search Increases (RPS)
This one is straightforward and represents the revenue per 1,000 searches on Facebook. We estimate that Facebook's RPS has declined from $8 per 1,000 searches in 2008 to around $5.80 per 1,000 searches in 2009 and could continue to decline to $3.20 per 1,000 searches by the end of Trefis forecast period. However if RPS declines at a slower rate to around $4, this provides some upside to our forecast.
4) Growth in E-Commerce Opportunities
Finally, retailers like eBay ( EBAY ) and Amazon (AMZN) have partnered with Facebook to leverage Facebook's growing base of users. Through Facebook, users can see reviews of the products and see how many people 'liked' a particular product. Net revenues represents for eCommerce represent any revenues net of any revenue share with third-parties.
We currently estimate that E-commerce will rise to about $1.5 billion in our forecast period which may prove conservative given the amount of information Facebook is storing and starting to share with third parties. If this business grows to around $2 billion by the end of our forecast period this would account for almost 15% of our $65 billion scenario.