Over the last year there has been fevered speculation about what the world’s fastest growing internet company is really worth. $10bn, if judged by Microsoft buying a tiny stake of 1.6% in 2007. $15bn, if judged by the 2% stake bought by a Russian investment group in 2009.

But the growth in users has slowed (unless Facebook actually starts giving free smartphones away in India and China), and like any maturing business it needs to be valued on what cash it is actually generating for shareholders.

So firstly, the top line. Facebook gets around 260 bn page views per day.

By a few simple experiments with their advertising platform I reckon the average click through rate for their adverts is just below 0.01%. They serve 3 ads on each page, so that means 1 in around 3,500 pages could be revenue generating for them. But that assumes they have enough advert inventory to keep showing new ads to their users (who get bored easily); perhaps safer to assume only 1 in 5,000 pages generates click-through revenue (or the equivalent).

We’ll assume the average click-through advertising rate is 30 cents.

$0.30 x 5m clicks = $1.5m per day = $550m per year.

The costs are not insubstantial either though: 40,000 servers – which probably cost the best part of $200m to buy and set up – and storing maybe 100 petabytes of images, video and log data (80bn images alone).

There are also 250 engineers and support staff, which is about $60m of annual cost.

So we could be assume that their total operating expenses are around $200m a year. That still leaves a healthy profit of $250m.

That doesn’t account for any revenue from some of their more sophisticated cross-sell and data-mining ideas – which have caused such user outrage. Assuming they can find a non-contentious way to double the profits over a few years, and maintain their pageviews (if not their share of global traffic), the business could easily be valued at 20x EBITDA, which gets you to … $5bn.

So it looks like Facebook needs to go some way to prove it’s worth, mainly because not enough people click on ads. That’s why we haven’t served ads at Teachable so far: only one is a few thousand users actually find them useful.

This entry was posted on Wednesday, July 14th, 2010 at 12:14 pm and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.