Facebook at $50 Billion Looks More Like Tencent Than Google

Facebook Inc., with a valuation of $50 billion, looks more like Tencent Holdings Ltd., China’s top Internet company by market capitalization, than fellow U.S. Web company Google Inc.

Goldman Sachs Group Inc. and Russian investor Digital Sky Technologies ascribed that value to Facebook through a $500 million stake, three people familiar with the situation said this week.

That puts Facebook on par with Tencent, whose services include online games and instant messaging, has 600 million users and is worth more than $42 billion on the Hong Kong stock exchange. U.S. Web pioneers Google and Yahoo! Inc. are poor barometers because they’ve struggled in social networking, while fast-growing social media startups Twitter Inc. and Zynga Game Network Inc. are still private.

“What’s public at that scale in social networking in the U.S.?” said Hans Swildens, founder of Industry Ventures LLC, a San Francisco-based investing firm that owns a Facebook stake. “When you look at the Asian comparables, there are companies that are at scale there in social networking.”

Investors are betting Facebook, which has surged fivefold in value over two years, will parlay its lead in social networking into sales of online advertising. While revenue at Palo Alto, California-based Facebook more than doubled last year to about $2 billion, the company has yet to tap the mobile-ad market, start selling ads on partner sites or take full advantage of such services as e-mail and location features.

Buzz, Bloom, Hype

Compared with Google, Facebook at $50 billion looks expensive. That valuation is about 25 times its 2010 revenue, almost triple Google’s price-to-sales ratio of 9, based on analysts’ estimates.

“Right now, there is a lot of buzz, there’s a lot of bloom on the rose, there’s a lot of hype,” said Robert Ackerman, founder and managing director of Palo Alto, California-based Allegis Capital. “Expectations are probably running somewhere ahead of reality.”

Facebook instead more closely resembles Tencent, which is valued at about 15 times revenue, according to Bloomberg data. Tencent, based in Shenzhen, also owns a stake in Facebook.

Baidu Inc., China’s most-used search engine, trades at about 31 times revenue. Youku.com Inc., China’s largest online video site, is valued at about 90 times revenue after selling shares to the public last month.

“There are companies in Asia with high valuation multiples and somewhat similar growth and reach characteristics, but where the monetization is still largely to come,” said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida.

Friending Donuts

Some advertisers are just starting to spend money on Facebook. Dunkin’ Brands Inc.’s Dunkin’ Donuts had 1 million fans on its Facebook profile page by the end of 2009 without buying any ads, said David Tryder, director of interactive marketing at the Canton, Massachusetts-based company.

Last year, Dunkin’ Donuts began buying banner ads on Facebook to drive traffic to its fan page, where it promoted products like its Coolatta frozen coffee drink.

Dunkin’ Donuts now has more than 2.9 million fans on its Facebook page and plans to continue spending this year to market new products and promotions.

“It’s become a great place for fans to give us feedback, discuss with each other and give us ideas,” Tryder said. “Where we’ve tried to intervene are in those places where we think we can add value, places where we feel like we can promote our products and things important to our business in fun and interesting ways.”

Ads That Work

Facebook may have taken about 9.4 percent of the display- advertising market in the U.S. last year, up from 6.6 percent in 2009, according to EMarketer Inc. in New York. Yahoo, which leads the market, was expected to grab about 16.2 percent, down from 16.5 percent, the firm estimates. Google, which is stronger in search ads, may have had 6.7 percent, up from 4.7 percent.

“I have been in the Internet space since the early days of display and the early days of search, and I have not seen anything grow as fast” as Facebook, said David Karnstedt, a former Yahoo executive who is now chief executive officer of Efficient Frontier, a Sunnyvale, California-based company that helps clients advertise online. “The most important thing is advertisers that are participating are finding it’s working.”

Tencent’s market value has more than tripled in the past two years as the company’s instant-messaging product, called QQ, has captured 77 percent of China’s market, with more than 630 million users.

Body Armor, Assault Rifles

The company also sells online games like “CrossFire,” which makes money by selling virtual items such as body armor and assault rifles. Tencent is expanding its QQ service and games business by offering products in other languages and countries.

While Facebook and Tencent may look similar in terms of revenue and number of users, the comparable valuations may not be justified, said Ackerman at Allegis Capital. Tencent is serving the world’s most populous country and largest Internet market. It makes money from online ads and mobile services in addition to instant messaging and games.

“There probably is a valuation premium because of the market,” said Ackerman. “Those premiums probably aren’t applicable to things in the United States. You’re talking about a new category, and trying to evaluate a new category and come up with good rational comparables is not easy.”

When Google reached the $50 billion mark in 2004, the Mountain View, California-based company had sales of $3.2 billion and a price-to-sales ratio of about 17. By the end of the following year, revenue had almost doubled and the company was worth more than $120 billion.

‘Huge Growth’

Goldman Sachs and Digital Sky, having seen Facebook’s financials, may be expecting the social network to grow more like Google did five years ago than it has more recently, said Larry Albukerk, founder of EB Exchange Funds LLC, a San Francisco-based firm that specializes in private share sales.

“They know the financials, they know the prospects, they know what deals are coming down the pipeline,” Albukerk said. The valuation “tells me that Goldman and DST and other insiders see huge growth prospects in terms of monetizing the business.”

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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