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Is Facebook really worth a Trillion Dollars?

You may have seen the film The Social Network. In the film, Jesse Eisenberg, playing Facebook founder Mark Zuckerberg, is musing on wealth. “A million dollars?” he says, and shrugs. “But a billion dollars… that would be cool.”

The film was released in 2010. Eleven years on the scriptwriters may need to add three more zeros.

At the end of June the company won a legal battle against US regulators, the shares rose 4.2% taking Facebook’s valuation past the $1tn mark, making it the last of the big five tech firms, along with Amazon, Google, Netflix and Apple, to reach that milestone.

A trillion dollars is £729bn, but is Facebook really worth that much? It is an interesting question for many investors, with traditional ways of valuing companies increasingly seen as irrelevant.

Go back a few years and investors were concerned about a company’s price/earnings (PE) ratio. A company’s share price relative to its earnings-per-share. A high PE ratio usually indicated a company that was growing quickly: but one that was too high, especially when compared to other, similar companies, often made investors wary.

Then there was the dividend yield, a simple ratio showing how much a company paid each year in dividends, relative to its share price. Investors looking for income went for solid companies with a good dividend yield. Investors looking for growth would accept a lower dividend yield, especially if the company was reinvesting profits, rather than paying them out in dividends to shareholders.

Underlying both these traditional measures was, of course, the belief that a company’s job was to make a profit.

How times change. Uber went public in 2019. At the time the company freely admitted that, while it had 91m users, “it may never make a profit.”

Such a statement would have been incomprehensible to a traditional investor. If a company never makes a profit, how can it pay a dividend? If it never makes a profit, how can it even continue in business?

Facebook, of course, does make a profit. In the first quarter of this year it reported revenue of $26bn (£19bn) which was up 48% on the previous year. The company’s net receipts grew 94% to $9.5bn (£6.9bn) as the average price of its ads increased by 30% and the number of ads it delivered rose 12%.

Many companies with spectacular valuations don’t make a profit, though. They are valued on expectations of future profits, on potential market share and on their perceived ability to disrupt traditional markets.

All this, inevitably, makes the job of the fund manager much more difficult, as they need to look at potential future results rather than what’s happened historically and it is, inevitably, further complicated by the changes the pandemic has brought about. To think of a company in the future being valued at a quadrillion dollars may sound far fetched, but there was a time when the same could be said about a trillion.

Sources
https://www.investopedia.com/terms/b/business-valuation.asp

https://www.investopedia.com/terms/p/price-earningsratio.asp#:~:text=The%20price%2Dto%2Dearnings%20ratio,multiple%20or%20the%20earnings%20multiple.

https://www.investopedia.com/terms/d/dividendyield.asp

https://www.bbc.co.uk/news/business-57644445#:~:text=A%20federal%20court%20dismissed%20two,accused%20Facebook%20of%20stifling%20competition.

https://www.imdb.com/title/tt1285016/

https://www.cnbc.com/2021/04/28/facebook-fb-earnings-q1-2021.html

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