Is A $100 Billion Facebook Ridiculous?

New projections suggest that Facebook will be worth more than $100 billion -- is that valuation ridiculous?

Growth IconIt seems like the press can’t wait long enough for Facebook to boost revenue, as reports this week predict that Facebook could be worth $100 billion when the company files to go public.

This projection first reported in The Wall Street Journal comes from $2 billion in earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2011, a number that we believe iactually underestimates Facebook’s potential.

However, the projection also shows just how pricey Facebook’s stock has become. First of all, Ebitda is a misleading benchmark, as most stocks trade based on net income. While revenue growth is a key indicator of a company’s potential, many analysts use the price/earnings ratio to give a ballpark comparison between companies.

If we assume that Facebook has a relatively similar financial structure to Google, Facebook’s net income could be half of its Ebitda. So that means Facebook is currently trading at somewhere around 80 times earnings. While not outrageous for a growth company, it’s still relatively high. Netflix, for example, is currently trading at 66 times earnings.

Hopes are still running high, though, with many Internet companies filing to go public leading up to the public offering of Facebook in an effort to take advantage of the ongoing hype. Much of the company’s growth projections are based on display ads, which Facebook currently holds the largest quantity of (out of any company on the Internet).

For the time being ,we’ll have to wait and see how Facebook performs, but overall, I’d have to say that Facebook is still a pretty expensive stock despite the growing revenues.

Readers, if you had the opportunity to do so, would you buy Facebook stock at a valuation greater than $80 billion?