Although Face­book has recently been val­ued at $50 bil­lion and $65 bil­lion, a con­sen­sus value on the com­pany remains unclear. Some ana­lysts think it’s grossly over­priced while oth­ers think its value is bound to be higher. While we shall steer clear of a poten­tially con­tentious opin­ion on Facebook’s true value, we thought it would be an inter­est­ing exer­cise to assess the expec­ta­tions on Facebook’s rev­enue and growth to jus­tify its vary­ing valuations.

Rather than build a tra­di­tional val­u­a­tion model, we have used an unortho­dox approach. Using Google as the bench­mark, we have assumed that Google and Face­book have a sim­i­lar low dis­count rate and sim­i­lar mar­gins. These assump­tions allow one to use rev­enue as a proxy for earnings.

Google has a mar­ket cap­i­tal­iza­tion of $200 bil­lion, i.e. four times Facebook’s value. Yet Facebook’s rev­enues in 2010 were 16 times lower than Google’s. All things being the same, the only way one can jus­tify the cur­rent Face­book val­u­a­tions is if we expect higher growth of Facebook’s rev­enues than the Google benchmark. 


Using a dis­counted cash flow model, I cal­cu­lated Facebook’s required growth based on an esti­mated growth of Google’s rev­enues. For instance, if the mar­ket expects Google’s rev­enues to grow at 20% a year for the next 10 years, Facebook’s rev­enues would have to grow at 46% a year.

The red line shows how much Facebook’s growth would have to be rel­a­tive to Google’s growth. In the wide range of rea­son­able sce­nar­ios that we have con­sid­ered, Face­book would have to grow between three and five times faster than Google over 10 years to jus­tify its $50 bil­lion val­u­a­tion. When we repeat this exer­cise for dif­fer­ent val­u­a­tion sce­nar­ios, the fol­low­ing trends emerge:


  1. Between $50 bil­lion and $100 bil­lion, at a 10–15% expected Google growth rate, the pres­sure on Facebook’s growth increases by a mul­ti­ple of the expected Google growth. Thus, if we expect Google to grow at 15%, Face­book would have to grow by 36% for a $50 bil­lion val­u­a­tion and 47% for a $100 bil­lion valuation.
  2. By our esti­mates, Face­book would have to grow three to four times faster than Google over the next 10 years to jus­tify its present val­u­a­tion. If we assume that the expec­ta­tions on Google’s rev­enue growth are between 10–15% for the next 10 years, then the expec­ta­tion on Facebook’s growth are 30–50%. Google’s his­tory is instruc­tive in under­stand­ing if this could be done. Between 2004 and 2010, Google’s Q4 rev­enue growth was 43% com­pounded annu­ally. It did so by rapidly grow­ing at first and then steady­ing to a slower but robust growth mode. Face­book appears to be where Google was in 2004–2005. Thus, if Face­book is able to rapidly grow over the next four to five years and then slow down, it should still be able to meet its lofty growth expectations.


Dr. Sid­dharth Shah
Sr. Direc­tor, Busi­ness Analytics