Valuing Facebook
Late last week, Microsoft announced it had brought on ex-Wal-Mart executive David Porter as Corporate Vice President of (AHEM!) Retail Stores. This site is designed and published on a Mac, the test server is run on one as well, and I just purchased an iPhone for my girlfriend (punishment for jumping in a river with her Crackberry in my swim trunks), so I can hardly formulate an unbiased opinion on this latest press release. In fact, I’ll let Kara Swisher at All Things Digital do the story telling on this particular business decision before I submit my own rant at a later date.
Burger King, however, can help us crunch some numbers to evaluate one of Microsoft’s past business decisions. In October 2007, Microsoft spent $240 million for a 1.6% stake in Facebook. This “valued” Facebook at $15B. Jason Kottke over at kottke.org decided to take a look at some numbers last month based on the BK Whopper Sacrifice Facebook Application ad campaign. For every 10 friends that users “un-friended” on Facebook, they would receive a free Whopper. We have adjusted the math for “local currency” and the numbers have changed recently so I thought it would be interesting to revisit. Kottke warns not to take this mathematical exercise too seriously, and I offer the same admonition.
Facebook is based in Palo Alto, CA. However, there are no Burger Kings in lovely Palo Alto (if you were from around this area you could guess why). There is however a Burger King in neighboring Mountain View, CA (aka Google View, CA). The price of a Whopper in Mountain View is $1.99. The sales and use tax rate in both MV and PA is 8.25%. Applying tax, a Whopper is valued at $2.15.
From the Facebook Stats page, we find that Facebook has 175 million users and the average user has 120 friends. We assume that these users are all in the United States (a false assumption) for the Burger King App purposes. We assume that the “average” from the average user is a mathematical average. The App also requires that both friends agree to the unfriending so that leaves only 60 friends, or 6 Whoppers, available for unfriending.
(6 Whoppers/user) x ($2.15/Whopper) x (175 million users) = $2.26B
A Motley Fool contributor last year tried to peg Facebook at 10x trailing revenue for a valuation multiple, citing Google and Bankrate as equals. This, by the way, was considered a middle ground valuation. That was a year ago, and today Google only trades at around 5x. Estimates put Facebook’s revenues at around $300 million for 2008, for a 5x trailing revenue valuation of $1.5B making our Burger King estimate look 50% too high. It also suggests Microsoft may have paid 10 times too much for their Facebook investment.
In the end, 233,906 friendships were sacrificed on Facebook for Whoppers. If Facebook values itself on generating income via advertising, the raw results are perhaps a better indication of the enterprise value. Assuming only one person missed their Whopper mark and only unfriended 6 people, this means Burger King owed Facebook users 23,390 Whoppers bringing Facebook’s local currency valuation to a whopping $50,288.50. Hell of a deal you guys got, Microsoft.
Source: kottke.org