The following is an excerpt from Jack Hough | November 30, 2011 | smartmoney.com
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: 599.39, 16.46, 2.82%), a dotcom firm with comparable scale and publicly reported finances, turns 27 cents of each sales dollar into profit, so 30 cents seems credible.
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…….
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