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Facebook: Worth Two Times Mozilla?

Written By Drupad Sil | April 29, 2008 | Share This | Print This Post

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Henry Blodget at Silicon Alley Insider unveiled the SAI 25 Live, an auto-updating list of the world’s “Most Valuable Digital Startups” as assessed by Blodget and his associates. More from SAI itself:

“Like public companies, the value of private change in real-time, but there’s no convenient way to track these changes… until now. We’ve created a real-time tool, the SAI 25 Live, that indexes the value of the SAI 25 companies to the NASDAQ. The SAI 25 Live updates the values in real-time (with a 20-minute delay). So if you’re jealous of all your friends at public companies who can recalculate their net worth all day, just check out the SAI 25 Live. This will tell you how much your stock options are worth right now.”

Now, there are a multitude of techniques available to perform valuations of public companies practiced by investors, ranging from the textbook (dividend discount model, earnings multiplier model) to the obscure (ask James Simons at Renaissance). However, they all have one thing in common: a heavy reliance on the availability of financial data, like revenue and profit numbers, free cash flow and balance sheet results. Unfortunately, these numbers are rarely publicly available for private institutions like those on the SAI 25 Live, leading one to wonder how accurate these valuations are. From the SAI 25 Live valuation page:

“Valuing companies is a subjective exercise, one that is highly dependent on information. In theory, companies are worth the present value of future cash flows, but since no one knows exactly what future cash flows will be (or the perfect rate at which to discount them), theory and a dollar will get you a cup of coffee. An additional challenge of valuing private companies, as opposed to public ones, is that detailed financial information is often unavailable or outdated. And many private companies are often early in their growth cycles and therefore haven’t reached mature profit margins.

Ultimately, of course, private companies are worth what any stock or asset is worth – what someone will pay for them.”

Of course, here Blodget is correct twice. Private companies are certainly worth what people will pay for them. Also, theory and a dollar will get you a cup of coffee, which is exactly the value of this analysis. The SAI 25 Live takes into account implied valuations in private financings (a terrible absolute indicator, but of some value directionally given an existing valuation), financial performance (nonexistent for most of this list), market share and market size (doable), and growth rate (dependent on revenue numbers, which are rarely reported and so must be guessed) making this list a poor indicator of anything other than relative valuations (Facebook is worth more than Ning, who knew?), and even there it can only be used sparingly (company X being worth Y times that of company Z on this list is probably meaningless). In the words of Erick Schonfeld at TechCrunch:

“Putting a value on private companies is hard enough for insiders and venture capitalists who have full access to the company’s financial statements. When outsiders try to do it, even well-informed ones, it is nothing more than a guessing game. But it is nontheless perhaps one of Silicon Valley’s favorite parlor activities.

Some of these valuations have more merit than others. Some have none whatsoever. For instance, SAI gets at its $125 million valuation for Digg by ‘splitting the difference’ between a $200 million buyout rumor we reported and the $60-to-$8- million that Kara Swisher came up with. Splitting the difference between the two rumors is not exactly the height of financial analysis.”

Agreed. Some have even gone so far as to call it an attention-grabbing activity, like FakeSteve:

“To make it fresh and dynamic, they somehow yoked these made-up numbers to the NASDAQ so their made-up numbers change into new made-up numbers all day long. That way all these [employees] working for worthless companies will click on that list all day long…generating loads of stupid traffic for Alley Insider. And trust me, that’s the real point of this list. It’s a cheap ploy for ginning up traffic.”

Or for pulling financial information straight from the horse’s mouth. There are so many requests for data that could correct these valuations that it almost seems like a device for getting these companies to divulge their actual numbers straight to SAI. Regardless, it is difficult to accept a 25x revenue valuation for Facebook common stock, given that Google trades at between 10.5x and 15x revenue, which in itself is unusual. Also, Wikipedia, valued at $7 billion, is a nonprofit, meaning the assessment measures Wikipedia’s asset value if it were to change into a for-profit organization. This change would certainly affect its users, which in turn would affect the site’s operation, affecting the valuation.

Perhaps the best thing to take away from this is that it is indeed just an entertaining parlor game to perform these valuations. Serious investors should already be familiar with this.

Topics: Facebook, Google, Investment, M&A, Wikipedia |

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