Is Facebook Really Worth $100 Billion?

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That’s the question many people are asking amid rising chatter that the booming social network plans to go public in 2012 and raise up to $10 billion in a deal that could value the company at more than $100 billion.

If Facebook’s IPO succeeds, it would be one of the largest public offerings in U.S. history and make the seven-year-old company worth more than iconic American firms like McDonald’s, Citigroup, and Kraft Foods. It would also turn founder and CEO Mark Zuckerberg into one of the richest people in the world, with an estimated net worth of roughly $20 billion.

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How could a company that doesn’t charge its users or make any tangible goods become one of the titans of American capitalism in less than a decade, worth $100 billion?

Facebook’s phenomenal growth has been propelled by the network effect of millions of people connected to each other by the Internet, and the increasingly sophisticated practice of targeted advertising. Zuckerberg, perhaps more than any other Internet entrepreneur of the last decade, has been able to synthesize these two trends into a wildly successful business. With nearly 1 billion users around the world, Facebook has become a truly massive web platform and serves as the primary vehicle for an ever-increasing amount of web activity and commerce.

Google remains the leader in so-called search advertising, which delivers text ads to web users based on the search terms they type into Google. But the battle is shifting to more sophisticated display ads, the bigger, more visually dynamic ads that increasingly incorporate video and sound. And in this fast-growing market, Facebook is surging, now serving nearly twice as many display ads as Google, according to eMarketer.

If Facebook does go public next year, it will likely be the penultimate act in a dramatic – and at times melodramatic – series of Internet IPOs that have occurred since the beginning of 2011. Many of the recent offerings have performed poorly, despite the predictable first-day spikes as insiders cash in quickly. Discount sales website Groupon and web-radio service Pandora have both seen their stock prices fall below their initial offering prices, pouring cold water on what some had called a nascent Internet IPO boom. Early investors got rich off Groupon, of course, but the company has been a shambles of late: It recently lost its second high-profile chief operating officer in six months and had to restate its already-unprofitable 2010 results down 50%. LinkedIn, a social network for professionals, remains above its IPO price, but is barely showing a profit.

Facebook, by contrast, is both growing rapidly and very profitable: The company is expected to post $2 billion in profit for 2011, double the previous year. Facebook is hiring like mad, gobbling up startups, and it’s just opened a massive new data center in rural Oregon. The company’s all-important profit margin – the portion of revenues it keeps after expenses – is 50%, according to industry estimates, comparable to Google’s when it went public in 2004.

By 2013, Facebook’s profit is expected to total $5 billion. Using a conservative Wall Street valuation formula for Internet companies – 20 times earnings, about the same as Google’s – Facebook’s valuation would be $100 billion. And it’s those forward-looking and fast-growing results that investors will be betting on during the IPO.

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But the most convincing statistic in Facebook’s favor isn’t financial: In just the last year, it has come to dominate the sheer amount of time spent by users on the web, according to data from Citigroup, handily beating Google, Yahoo, Microsoft and AOL.

Skeptics argue that Facebook’s profit potential is overrated, and point out that many successful Internet companies are inevitability overtaken by new, more innovative upstarts. The key question is whether Facebook will be able to transition from a phenomenally successful startup to a mature, e-commerce giant like Google or Amazon. Is Facebook worth $100 billion? Maybe not today, but the company is trading at a $70 billion valuation on private markets, and Goldman Sachs was confident enough to organize a $1.5 billion investment earlier this year for its wealthy clients. Li Ka-shing, Asia’s richest man, is also an investor.

Ultimately, Facebook, like any company, is worth what investors are willing to pay, and the effect of market psychology should not be discounted, especially when it comes to high-profile Internet stocks. If recent history is any guide, the hype – fueled by the company, its bankers, and tech pundits – may end up being more influential than any financial projection.