How Facebook’s Ad Business Can Support a $100 Billion Valuation

Display and text ads by far contribute the most value to Facebook currently. This accounts for almost 75% of our $74 billion value estimate for the social networking giant. The reason Facebook commands such as high valuation is both the scale of its business (at well over 800 million users) as well as its high user engagement. As it grows, it is taking market share from peers like Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO).

While several initiatives such as the sale of virtual goods and social commerce could add upside to our estimates, advertising will remain the largest value driver by far. We explore upside scenarios that could lead to greater ad monetization from higher quality content such as radio and video as well as the expansion into emerging markets which could provide upside to our user forecasts. These factors could add roughly 35-40% upside to our current estimates justifying a $100 billion valuation.

See our complete analysis for Facebook

~20% Upside: Moving into High-Quality Content

By our current estimates, Facebook’s revenue per 1,000 page views (RPM) stood close to $0.29 for 2011, and we expect this figure to cross $0.35 by the end of the Trefis forecast period. The key driver behind monetization growth is Facebook’s foray into different media offerings, including music and video.

The company has already announced a music service in partnership with Spotify, Rdio and MOG, and is looking for a possible video ad-sharing deal with Vevo. Having said that, Facebook’s RPM could be dragged down by its mobile growth since monetization rates for mobile continue to be lower than that for PC’s. How Facebook manages its mobile monetization in the future will have a large impact on its outlook.

In aggregate, if RPM rates increase further to around $0.45 by the end of the forecast period, there could be a 17% upside to Facebook’s valuation estimate.

~20% Upside: Emerging Markets to Drive User Growth

While Facebook’s overall monthly unique visitors rose by 39% from 2010 to 2011, ^[1] emerging markets have clearly led this growth. During the same time frame, Brazil and India registered growth rates of 268% and 132% respectively. Additionally, Facebook’s penetration rates in these countries stands at 20%-30%, representing a significant potential for further growth.

While we currently estimate Facebook’s user base to reach around 2 billion, there could be an additional 17% upside to the company’s valuation if its monthly unique visitors increase to 2.5 billion. You can toggle the driver below to see how this would react based on your own assumptions if you think it could be higher in the years to come.

The updated Trefis valuation for Facebook stands at roughly $74 billion based on newly released information in the company’s pre-IPO filing.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Facebook’s S-1 filing, Securities and Exchange Commission, 1st Feb 2012 [↩]