Social Media Sites – Valuation Out of Control?

Strategy Plan One

April 16, 2012 

social media sites - valuation Social Media Sites

Social Media sites seem to pop up out of nowhere, gain popularity, and before anyone knows it, the company behind the site is worth millions or billions of dollars.  What is driving business valuation of a current wave of social media sites?

This pattern is very similar to what was seen in the early internet years of internet sites popping up and soon valued at millions of dollars.  There are certain valuation factors that go into valuing web sites and the new wave of social media sites.  Although heavy financial analysis has much weight in valuation, factors such as the number of users, market potential, innovator factors, revenue potential, goodwill and speculation are all considered into the valuation models.

Social Media Sites – Revenue

The biggest revenue driver behind social media sites is advertising revenue.  In approximately 77% of social media sites, ad revenue dominates the revenue streams.  In 2011, Facebook alone was estimated to bring in $2 Billion from ad revenues.  Based on financial analysis formulas and calculations, analysts can determine advertising revenue potential by the number of users, visitors and page views.  Valuation models can involve calculations on potential revenue and future value of earnings or revenue.  Models can factor in complex valuation, with estimates of total revenue potential of social media sites which would include ad, user fees, subscription, licensing and other sources.

social media sitesSocial Media Sites – Number of Users & Market Potential

Even if the social media website has not generated one dime, but has millions of users and potential to earn revenue, speculative valuation can be determined.  An investor will be interested in a business acquisition if there is a projected return on investment.  A website that contains an existing, massive base of subscribed members, paid or unpaid membership base, would be appealing to an investor.

Most investors are looking at the revenue potential and would be interested if the valuation of that same asset has been projected to increase.  Obviously the investor may be looking for a return based on an asset turnover a few years down the road when selling off the acquired business.

Information, Mechanics and Proprietary Features of Social Media Sites

Valuation factors may also include value based on the mechanics and functionality of the website.  Through some analysis of backlinks and SEO, some automated valuation models can determine valuation of a website based on the standards created by other existing websites.  The value of the content is also important, along with any proprietary and/or patented features, widgets and coding, original to that website.

Speculation of Social Media Sites

Those in the technology field may fuel speculators by stating the what the next greatest social media sites will be, citing the next greatest thing on the internet.  When that buzz occurs, so does the buzz around the speculation on value.  Once again like other valuation factors, speculation may be driven by revenue potential.  Speculators may estimate the market potential, number of future users, future revenue, future return for investors.

Social Media Site – Valuation of Assets and Goodwill

In most acquisition projects, business valuation is undertaken to determine the valuation of assets and the valuation of goodwill.  Goodwill is the valuation of the intangibles (non-assets of the company) such as the name of the company, the Brand of products and services, and the value of relationships with the audience.  Goodwill in the name will be carried forward with the new owner or investor, as long as names or Brands, or customer appeal do not change that much.  Speculation sometimes drives up the valuation of goodwill, and sometimes investors must gamble with investing on an acquisition that has a high goodwill valuation attached to it.

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