Much of the buzz surrounding the Facebook IPO stems from its sheer size. With a speculated valuation of $75 billion to $100 billion, it would be on par with companies such as Bank of America ($75 billion), Amazon ($90 billion), and McDonald’s ($100 billion). But do the numbers bear that out? Based on past earnings, speculation would price Facebook at 75 to 100 times earnings, or in the same territory as Google.
Anup Srivastava, an assistant professor of accounting information and management, thinks those numbers are too dear. “My best case scenario valuation is $25 billion,” he said. “This is based on the firm’s revenues reaching approximately $21 billion in ten years’ time from approximately $4 billion today, and the firm maintaining a high return on assets of approximately 20 percent.”
It is difficult to say what exact number the market will bear, but for those who like to speculate, Srivastava has developed a Facebook valuation tool, available in either an interactive web version or a downloadable Excel spreadsheet.
From an accounting perspective, Facebook isn’t facing the same scrutiny as Groupon, which employed some clever accounting to polish its image. Still, Srivastava is not entirely satisfied with Facebook’s filings.
“I would have preferred to see a detailed break-up of cash flow from operations,” he said. “I would have also preferred to detailed break-up of non-current assets, to examine whether firm is capitalizing any expenditures that it should expense. Net income of exactly $1 billion raises a red flag. It is difficult to achieve an exact number without manipulation. Maybe the firm underachieved the threshold and managed its earnings upward. Maybe the firm overachieved the threshold but deposited some earnings in cookie jars to show higher earnings in future.”
Srivastava offers another cautionary note to prospective investors. “Investors should take into account the deep in-the-money options held by management,” which if exercised could potentially dilute the value of outstanding shares. Furthermore, one share of common stock will have only one-tenth the voting rights of shares held by controlling shareholders, he pointed out. “I do research in this area, and this extreme anti-takeover protection mechanism of dual-class share structure concerns me, because I believe in the motto ‘absolute power corrupts absolutely.’ ”