I was going to write a post about Facebook’s valuation, but Bill Gurley has done such an excellent job, that the better idea is to point at his post explaining “Why Facebook Clearly Belongs in the 10x Revenue Club.” There is one other important point to consider in thinking about Internet company valuations in the current economic environment: low interest rates. Companies that are still growing and have a lot of room for future growth have a fair bit of their value sitting in the future – that’s certainly true for a company such as Facebook. As we are currently in a global deflationary environment (*) the discount rate being applied to these future cash flows is lower than it has been in a very long time and possibly ever. When I started learning about DCF models in the late 80s, a common rule of thumb was to use 7% for the risk free rate of return!
The (*) above is to indicate that we have been expanding the money supply like never before but the lending multiplier has contracted even faster and supply is far outstripping demand in combination resulting in a deflationary environment.
PS If anyone has seen a good analysis of revenue composition for Facebook (advertising versus credits, assuming that’s even disclosed in the S1) please let me know
