Are scientists overrated

Facebook is worth at most half as much as previously assumed. This is shown by a new calculation model by the two ETH researchers Peter Cauwels and Didier Sornette, with which they reassess the stock market value of the social network.

The two researchers estimate the effective enterprise value of Facebook at 15 to 33 billion dollars. In the relevant press, however, numbers between 66 and 100 billion are making the rounds. "That is a clear overestimation," says Peter Cauwels. "Another speculative bubble threatens here." That has happened before on the Internet. At the moment, rumors are mostly circulating about the value of the social network. "In order to raise the discussion to a factual level, we have developed a model with which we can better assess the value of social networks," emphasizes Cauwels.

Together with Professor Didier Sornette from the Professorship for Entrepreneurial Risks at ETH Zurich, Cauwels calculated the value of Facebook based on the development of user numbers, in particular the expected increase in users. The real user growth seems to level off after a steep, seemingly infinite increase and to level off at a certain level. Around 750 million people around the world are currently registered on Facebook. “The S-shaped growth curve is a clear indication that Facebook will not continue to grow forever and that saturation is now occurring,” says Cauwels. The scientists also took into account the net profit per Facebook user, which is currently one US dollar. However, no official figures are available for this; the scientists therefore had to rely on estimates circulating in the business press such as Reuters and Bloomberg.

"Only" worth $ 15.3 billion

If the researchers calculated the value of Facebook with the current development of the number of users, which will not exceed one billion, then the social network is worth 15.3 billion US dollars. In a medium scenario with high user growth and a future number of users of over a billion, Facebook would be worth 20.2 billion. In the extreme growth scenario, which equates to nearly 2 billion users, the network would be worth $ 32.9 billion.

According to their model, Facebook would have to increase its profit per user before going public in the base scenario by a factor of three to six, in the second scenario by a factor of 2.5 to 5 and in the third scenario by 1.5 to 3, if the company wants the current, meet widespread high expectations.

Financial mathematics and physics paired

The valuation of Cauwels and Sornette is based on a mathematical concept of discounting cash flows (discounted cash flow). This is used to determine the net present value of a company. The economic value of social networks lies in the advertisements and user profiles that can be sold (for advertising purposes). Since Facebook has no other values ​​than its users and the associated advertising volume, it is sufficient to use the average profit per user and the number of users to calculate the company value. The researchers used five percent as the discount rate. The two ETH researchers also used approaches from physics for their model. The calculations can be applied to the economy. Cauwels says that he also selected the boundary conditions in the model in such a way that they are advantageous for Facebook.

New bubble

Facebook's capital was massively increased in January 2011. There are now more than 500 investors behind this platform. But that forces Mark Zuckerberg's company to prepare an accountability report for the business, which brings Facebook closer to a public society. "Because the company has to go through this effort one way or another, the IPO shouldn't be far off," estimates Cauwels. Facebook has to submit the statement of accounts in April 2012, after which the ETH researcher expects the billion-dollar empire to go public.

Banking specialist Cauwels knows that Facebook could turn into a speculative bubble is not just the platform's problem. The organizations that invest in Facebook expect huge profits from the IPO.

"Investors even make profits by helping the company go public," he knows. The discount platform, for example, paid the investment banks that helped it go public with writing fees of over $ 30 million.

Groupon was also scrutinized in the paper by Cauwels and Sornette, which will soon appear in Portfolio Management magazine. This internet company is valued at $ 30 billion, which is more of a fantasy than reality. According to the company to the supervisory and stock exchange commission, the shares will be issued at a price of 17 dollars, which will correspond to a total value of 11 billion dollars. Incidentally, Groupon is in the red and has already lost $ 170 million this year.