Recently Facebook raised $ 1 Bn (received $ 1 Bn) based on a valuation of $ 50 Bn. The question that often arises is how are the companies valued. There are many aspects that go on while making forecasts about growth/valuation of a company. Investment bankers/consultants/Analysts takes into account numerous factors by looking into history, company management, industry growth, economic factors and many other variables in order to arrive at a number that depicts the value of the company based on how good is its future.
On the other hand Google is valued (enterprise value) at $ 164 Bn. Facebook and Google are two well known companies and often comparison is made between them. In order to compare these two companies we need to take another financial number and compare the ratio. Now there are various ways of doing it. Rather than making it an Investment banking exercise let’s keep it simple and compare valuation per unit of revenue ie divide valuation by revenue. It will indicate to what level a company is valued for every dollar it earns.
Facebook Valuation: $ 50 Bn
Facebook Revenues: $ 1.6 Bn
Facebook Valuation to Revenue Ratio: 31
Facebook primary source of revenues: Display Advertisement
Google Valuation: $ 164 Bn
Google Revenues: $ 29.32 Bn
Google Valuation to Revenue Ratio: 5.6
Google primary source of revenues: Search Advertisement
Facebook valuation to revenue ratio is almost 5.5 times that of Google. Since we know that valuation is primarily based on estimation of how much a company will earn in future and it happens that in this case primary source of revenues are advertisement on its platform. Does that mean that display advertisement will be the future?
Well it is difficult to say what will be the future, however Social networking sites provide rich data source for relevant targeting. Search and non social display advertisement would need to emphasis on getting rich user information for relevant targeting in order to provide a better ROI to the advertisers. The future would be guided by the companies that are able to gather relevant user information and use them in a way that enables efficient advertisement.
P.S.: I am referring to search advertisement as all the ads shown on Google/Bing/Yahoo search page and anything else is referred to display advertisement for the purpose of this blog. Also please note that these are indicative figures and not exact.