So how does Facebook get a $96 billion valuation?

Right now, it's because that's what the company says it's worth. But investors will have their say.

By Charley Blaine May 3, 2012 11:14PM
Updated: 9:17 a.m. ET, Friday

There was a lot of excitement Thursday afternoon when social-networking site Facebook said it might price its shares from $28 to $35 -- or as much as $11.81 billion -- when it goes public. It could mean Facebook is worth between $59.9 billion and $96 billion. The initial public offering price is expected to be set May 17, with trading set to start on May 18.

The next question is whether $28 to $35 makes sense. This is a judgment call that can be made only by the buyers of the IPO and investors once trading starts. Right now, the assumptions that would make those numbers possible suggest a pricey stock.

Here's how the deal works.

Post continues below.
The public offering consists of 337.4 million shares that are being sold by early investors and employees, including CEO and founder Mark Zuckerberg. Facebook is talking about making 20% to 25% of the offering available to small investors, The New York Times said late Thursday.

When the shares are sold, there will be about 2.14 billion outstanding. If the price is $35, that implies a market capitalization of about $76 billion. Add in restricted stock, options and some 22 million shares to be issued to the shareholders of Instagram, and the total swells to about 2.74 billion shares. At $35 a share, that implies a market value of about $96 billion.

Instagram is the photo-sharing service that Facebook hopes to acquire in a cash-and-stock deal valued at $944 million to $1.1 billion.

The high end of Facebook's IPO range implies a trailing price-to-earnings ratio above 70. If you assume Facebook grows net income 20% this year to about $1.2 billion, that translates into earnings per share of 43 cents. That, in turn, produces the forward P/E ratio about 80. That's lofty. Apple's forward P/E ratio is 10.8. Google's is 14.8.

Admittedly, Facebook's 2011 net income grew 64% from 2010, and 2010 was up 180% from 2009.

Investors who want in on the IPO are assuming Facebook can continue to grow rapidly. Revenue was up 78% in 2008, 186% in 2009, 154% in 2010 and 88% in 2011.

But there's no guarantee those growth rates will continue. Revenue in the first quarter of 2012 was up 37% from a year earlier but down 7.5% from the fourth quarter. The  year-over-year growth rate has declined for five straight quarters.

The odds suggest that there will be some tough questions for Zuckerberg and his team and his investment bankers during the presentations the company will make to investors over the next two weeks.

Revenue and profit growth will be an issue. So will the company's rapid investment in new engineering. And there will probably be precise questions on advertising impressions and on the rates at which impressions translate into revenue for the advertisers, The Wall Street Journal noted on Wednesday (registration may be required).

The answers Facebook provides will help determine whether it is able to go public at $35.
May 4, 2012 6:08AM
Just part of the ongoing scam known as Wall Street. 
May 4, 2012 7:40AM
May 4, 2012 8:31AM

Facebook is not worth $0.98 to me. 


May 4, 2012 7:50AM

I wouldn't give you 2 bits for

I never joined facebook...

Saw how much time others wasted on it...

Wouldn't like the idea that , Anything I posted, is being sold to others for profit...?

May 4, 2012 7:08AM
Am I the only person who has heard of the Fable   "The Kings new clothes"??? can you buy nothing?....cos when its switched off....who has what?....oh yes...Zucker has 98 billion dollars and you have ..????...oh yes...nothing.
May 4, 2012 7:57AM

ipos r ponzie schemes dont buy them.


wallstreet is a scam take yur money out

May 4, 2012 8:43AM
I think Facebook is a waste of people's time. Read a book people.
May 4, 2012 10:02AM
BTW, MSN Money, knock it off with the auto-starting videos!!
May 4, 2012 7:48AM

How can anything without a spell check be worth 96 billion???


I wonder if they're going to give any stock to the kid they stole the idea from????


It's sad how our society has degenerated to the point where thieves, and people in general, are idolized simply because they have made a lot of money...Really sad.

May 4, 2012 10:06AM
"So how does Facebook get a $96 billion valuation?"

ahhh, because the world is full of morons. I'm not on Facebook will never be on Facebook. I enjoy my life without such a ridiculous waste of time. Go outside and turn your computer off!

May 4, 2012 8:37AM
When will America learn that when a company goes public it has lost it's true market value and wall street is pimping it out to suckers who don't have the knowledge to know any better?  When companies used to go public it was to raise capital for expansion.  How in the hell is Suckerberg going to expand bragbook?
May 4, 2012 9:49AM
Get off face book, the stock market is for suckers go ahead over pay for the worthless company dummies
May 4, 2012 12:39PM

Fads are popular and far overpriced until they become out of fashion and/or are replaced by another fad.


This too will happen to Facebook.

May 4, 2012 11:17AM

So what's the company pay in Taxes... that's the real numbers right...NOT....


The company is only worth its product. That’s right it doesn’t have one.

We are the product, if it wasn’t for the people that have posting on FB.

They wouldn’t have anything. They sell all your information that you post.

They have the right to whatever they want once you check the box you want

To be a member.. How do you think they made all their money… it’s your information

That’s way you get all that junk mail. Just look at that stuff sometime…

Sell sell sell…

Now you know what you are worth on the open market…

May 4, 2012 10:56AM
Another "Flash in the Pan" technology company that will probably fizzzle out eventually.  Personally, I wouldn't touch it!  Maybe some money to be made short-term, but NOT long-term!
May 4, 2012 10:01AM
The real mystery is how FB has been so successful, while trotting out some of the worst, most user-unfriendly, obtuse software I've ever seen, and having endless privacy problems, to boot.
May 4, 2012 9:56AM
Read about the lawsuit at Donna kline now. Learn about the true story whats going down with Facebook when the appeals court rule in Leaders favor. It will cost BILLONS read about it NOW PLEASE.
May 4, 2012 11:01AM
Smile Face book is valued same as the painting the scream. I wouldn't even care to hang it in my garage. People with too much money had lost their sense of reality while they are getting rich and richer and they have no concept of reality when they spends their money.
May 4, 2012 9:42AM

I want my share for using facebook! LOL

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