What should count in a company's market value?

What should count in a company's market value?

Summary: Back in school, I loved numbers and would score distinctions in most of my Math papers. I would, just for fun, mentally add up the groceries in my mum's shopping basket and watch with pride when the number I totaled up in my head matched the one illuminating in the cash register.

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Back in school, I loved numbers and would score distinctions in most of my Math papers. I would, just for fun, mentally add up the groceries in my mum's shopping basket and watch with pride when the number I totaled up in my head matched the one illuminating in the cash register.

But, my passion for numbers ended with economics classes. One plus one equals two was easy, but in economics, one plus one doesn't always equal two. Market conditions have to be taken into consideration, as well as the local and global economic landscapes, and sometimes, the same question can have varying answers.

Take the value of a company, for instance. During the dot-com boom and IPO frenzy in the late-1990s, I asked a financial analyst how a company's market value was calculated. The answer was easy enough for listed companies, where the most conventional method would be to multiply the price of its share by the number of shares for issue.

This number, though, gets fuzzier with companies that aren't publicly listed. Ask any financial analyst how the value of an unlisted company is calculated and you'll get varying answers, but some common elements will emerge such as overall profitability of the company and investor confidence. Basically, a company's market value reflects how much the public is willing to fork out to own a share of it.

So, when you put a company like Facebook into the mix, this perceived value skyrockets. The social networking giant will IPO later today and has priced its share at US$38 by pop. That gives the eight-year-old company a market value of US$104 billion to US$107 billion, according to various reports.

I've been trying all morning to wrap my head around how those numbers were conjured up.

Facebook had made eight amendments before coming up with the magic number of US$38. With plans to sell 421 million shares, it will rake in US$16 billion if it sells out, and give these stakeholders 15 percent share of the company.

So, by my simple calculations, at US$38 per pop and 421 million shares for 15 percent stake in the company, this should add up to US$106 billion for a 100 percent stake. Or does it? Is Facebook right to give itself a pricetag of US$38 per share?

One key concern among industry watchers is the company's revenue model. Facebook generates 80 percent of its income from advertising, putting its average yield at US$4.34 per user. Market analysts estimate Facebook's ad revenue would need to increase to several hundred dollars per user to validate the US$100 billion-plus valuation. The numbers, though, aren't promising. Its first-quarter 2012 ad revenue slid 7.4 percent, marking the first quarter-on-quarter dip for the company.

But these are all hard financial figures. Should other factors influence a company's market value? What about its business ethics and customer service ethos?

Facebook in the past has made a habit of changing its privacy policies, irking activist groups and users. Should this have been taken into consideration in its valuation?

Ask successful companies what makes them successful and some oft-cited traits include placing high priority on customer service, market adaptability, improving productivity and the humility to recognize strengths as well as weaknesses.

Shouldn't these traits also matter in assessing a company's market value?

In this day and age where money does most of the talking, it's perhaps easy to forget it isn't just about how much a company makes, but also how much value it returns to the market, that matters.

Topics: IT Employment, CXO, Start-Ups

About

Eileen Yu began covering the IT industry when Asynchronous Transfer Mode was still hip and e-commerce was the new buzzword. Currently a freelance blogger and content specialist based in Singapore, she has over 16 years of industry experience with various publications including ZDNet, IDG, and Singapore Press Holdings.

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  • Boy, you've opened a can of worms now.

    Wait for the rants & raves.
    eapete-59bf6
  • waiting...
    eapete-59bf6