Facebook’s Revenues Grow, But Financial Market Expectations Growing Even Faster

Although Facebook’s revenues have steadily grown every year since it was founded in 2004, its valuation has seen many more ups and downs. Uncertain about the company’s future, investors and would-be investors have waffled on what they’re willing to pay for the company’s stock.

But the company started growing revenue more quickly over the course of last year, and now valuations are climbing more than ever.

Investors looking to purchase privately-traded shares of the company have been paying at share prices that imply common stock valuations at around $18 billion. This is a notable number, because it’s more than the $15 billion valuation that Microsoft purchased its preferred stock at back in 2007 — a move that was widely derided at the time.

The current value of Microsoft’s and other preferred shareholders’ Facebook stock is higher than the new common stock valuation, we can assume at this point (note that Facebook and its investors don’t discuss these numbers, because the company is privately held). Without getting into all the details, preferred stock comes with special agreements, like the ability to sell first in the event of an acquisition or public offering, or strategic relationships like what Microsoft has. See Facebook’s prominent promotion of its Bing search engine in its search results page for an example of “strategic.”

We don’t know how much common stock is being discounted from the preferred stock price — the typical practice — but if Microsoft and the other investors who got in at the $15 billion valuation were to sell their Facebook stock today, they’d almost certainly make a profit.

Valuations are growing due to statements by the company — it said it was “free cash flow positive” last fall — and from third party reports discussing growing revenues. We estimated a month ago that the company made between $600 million and $700 million last year, and could make up to $1.1 billion in revenue this year. Following the article we’ve since confirmed that estimate range with and additional source familiar with the matter.

The company’s advertising growth, in particular, is looking more legitimate as both brands and a wide variety of performance advertisers have begun spending more money on it in 2009. While the company doesn’t directly monetize the payments-driven business that’s gotten big on its developer platform, it intends to — somehow — with its Credits virtual currency.

Investors are excited, and this is now driving up expectations in a way that once again may be increasing expectations well above where Facebook is going to be in the foreseeable future. Here’s a closer look at how Facebook’s valuations have changed along with its revenues since 2004.

2004-2005

Friendster got close to buying its then-smaller rival for $10 million in its first year, according to some rumors. Facebook was just on some US college campuses then, and busy growing. 2005 saw it solidify its market more, and was valued at around $100 million by the end of the year. Aside from a few tests, its revenue streams were minimal as far as we know.

2006

The industry  started getting more interested in Facebook early on in the year. The cmopany rejected a $750 million purchase offer — one rumor said the offer was from Viacom — and was looking to sell at $2 billion, according to a report from March of that year. But around the same time it closed a round of funding that pegged the company to be worth $550 million. Another rumor around the time suggested Yahoo wanted to make a strategic investment at this time, at the $750 million valuation. By the fall of 2006, Yahoo was reportedly looking to buy Facebook for $1 billion, and was willing to go up to $1.62 billion.