Facebook equals Broadcast.com equals Geocities?

It was reported a few days ago that Microsoft is considering buying a minority stake in Facebook, the social networking site. The investment implies a value for Facebook of $10 billion. So what can $10 billion buy you these days?

Facebook, according to the Wall Street Journal, will have revenues of $150 million, and profit of $30 million in 2007. That gives us a multiple of 67 times sales and 333 times earnings. This assumes that the $30 million are actual “earnings” and not “adjusted” or “non-cash” earnings.

Growth you say. “Don’t forget about growth,” you scream at the top of your lungs. “I worship the god of growth.” Let’s do a discounted cash flow model and see what those earnings have to grow at, that when discounted to the present, justifies a valuation of $10 billion.

If we use the following assumptions

Growth Rates

Years 1-5 40%
Years 6-10 25%
Years 11-15 15%

Terminal Growth Rate of 2%
Discount rate of 7%

We get a present value of cash flows of $10.1 billion. Zuckerberg….take the money and run.