By JACK HOUGH
Large numbers are difficult to conceptualize. The Wall Street Journal reported Monday that Facebook is targeting a spring initial public offering that would value the company at $100 billion. Is that a lot or a little for a website with more than a half billion daily users?
One way to make sense of the price investors are paying for a company is to compare it with the thing investors are attracted to in the first place: underlying prosperity. Facebook's revenues doubled to $1.6 billion during the first half of 2011, according to a Reuters report citing a source with knowledge of company financials. Given the growth trajectory, many investors believe Facebook will bring in $4 billion in sales this year. That puts the stock's projected price at 25 times revenues.
By that measure, Facebook would be more expensive than all stocks in the S&P Composite 1500 index of large, midsize and small companies. The index's median price-to-sales ratio is 1.2.
Profits are more difficult to guess, but here's a start: During the first three quarters of 2010, Facebook reportedly had a profit margin of nearly 30 cents on the dollar. Google (GOOG),
That puts Facebook's 2011 profit at $1.2 billion, and its price-to-earnings ratio at 83. Among peer companies, only Amazon.com is that expensive -- and only because its profits this year are expected to plunge by half on higher expenses before rebounding next year. Historically, U.S. firms have traded at an average of around 15 times earnings.
Another way to think about Facebook's estimated $100 billion value is as a Wall Street shopping budget. What sort of firms could investors buy with that money?
They could buy General Mills (GIS),
Fast growers, these eight firms aren't. Most are expected to increase their sales by single-digit percentages in their current fiscal year. But they're starting off from a much higher income base: 24 times Facebook's estimated sales and six times its estimated profits. Plus, they pay an average dividend yield of 3.5%.
The point, of course, is that the earliest glimpse of Facebook's IPO makes it look plenty pricey. This column voiced similar concerned about recent dotcom IPOs from LinkedIn (LNKD)