Facebook’s Value Potential Comes Down To Revenue

Ramping up revenue will be key to Facebook reaching values in the tens of billions, putting it in the company of giants such as eBay, Google and Yahoo!.

A report from Bloomberg gave the privately held social networking giant a value of $41 billion. EBay has a market capitalization of $39.3 billion, and is one of the largest web retailers in the U.S. Google's market capitalization now stands at $186 billion. Yahoo! is valued at $21 billion.

Many internet analysts compare a possible Facebook IPO to Google and Yahoo!, at least in the sense that all three are web-based companies. But the stock's trajectory is far from certain, as shown by the wildly different fates of Google and Yahoo!

In 2004, Google went public at $85 dollars per share. At the close Wednesday, Google's stock was trading at $583.72. Yahoo!'s stock debuted at $24.50 per share back in 1996 and would reach heights of a little more than $100 per share in the early part of last decade. Currently, its trading at $16.24.

Any chance of Facebook reaching Google's astronomical numbers is highly unlikely, says Gleacher & Company analyst Yun Kim. Those were different times, stocks were much higher, he said. Facebook could match Google and Yahoo! in terms of revenue run rate, if it finds a way to monetize its large user base.

You can't take what they're using today for revenue. It's all based off mindshare and traffic. They need to figure out how to make money and look at the overall market, and probably capture a certain percent of display revenue and advertising revenue. A $30-50 billion valuation eventually is not out of the realm of possibility, Kim said.

Augie Ray, analyst at research firm Forrester, also says Facebook needs to mature from a revenue standpoint. However, he does see paralells between those companies when they filed for their IPOs and Facebook today.

Facebook is in a tremendous position of power and the growth of their advertising revenue shows that. That said, 3-4 years from now, the way Facebook earns revenue may be somewhat considerably different. It isn't mature right now in terms of stability with revenue and sources of revenue compared to Google or Yahoo, but there is a good comparison with those firms pre-IPO, Ray said.

In order to increase potential revenue streams, Facebook has expanded beyond its social networking roots. At a recent event, Facebook introduced a new form of Messages. While CEO Mark Zuckerberg specifically said the service was not meant as an email killer, it does attempt to evolve online communication.

They are betting on the fact people will use email less and other forms of communication more, like texting and instant messaging, Kim said. While it's unclear how this service could be monetized, Ray says there are plenty of opportunities.

Right now they are not scanning the content of the messages for advertising purposes. Other online companies, Google and Yahoo! specifically, scan the contents and target emails. It's probably a strategic move to earn trust from the users, who at times have shown concern over Facebook's privacy settings. It's a smart move on Facebook's part. It doesn't mean they aren't making money, the more time spent on Facebook means more ad awareness, Ray said.

Ray also says Facebook has great revenue possibility with the newly launched Places Deals platform. The platform, similar to Groupon, allows local merchants to promote deals and target people who live in their area. Currently, Facebook offers this for free.

Over the next year or two, as more people check in and enjoy deals, the demand will grab the attention of marketers. Then you could see people bidding for the top spot. They won't want to be one of 50 deals. They'll want the top spot. It could be layered with bidding, like Google Adwords. Places is a good example of something that's not driving revenue now, but could in the future, Ray said.

Ultimately, Kim said he sees Facebook landing somewhere in between Google and Yahoo! If you look at the overall advertising market and then take a 50 percent cut, look at what Google has and Yahoo has, they're probably going to be somewhere in between, Kim said.

As for when Facebook might file for an IPO, the company's board member, Peter Thiel told Reuters and Fox News that it will not happen before 2012.