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June 20, 2012

Small businesses on Facebook will help company prove its valuation

Experts say that Facebook will justify a $100bn valuation in the coming years, but its small businesses that use Facebook which will help the company achieve its revenues.

By Tineka Smith

Photo Credit: Kevin Krejci

In just one month after its IPO, Facebook has lost more than $25bn in value.

While some analysts say Facebook will not be able to prove its massive valuation in the coming years, others remain positive.

Victor Basta, managing director of Magister Advisors says that Facebook will be able to prove its short term value but it will be smaller businesses that use Facebook’s platform that will make this possible.

"The Facebook ecosystem will undoubtedly achieve the revenues that justify the $100 billion valuation," says Basta. "The point is that it’s the ecosystem rather than Facebook itself."

Facebook is now under constant pressure from investors to prove its valuation after its recent fall in shares and lacklustre IPO performance.

"The difficulty for investors focused on short term returns is that it appears that they may be backing the wrong business," says Basta. "It’s the other businesses that operate within the ecosystem that are currently better positioned to give investors a decent return."

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Investors are increasingly realising that businesses which use Facebook may be the key to Facebook’s success.

"The markets are telling us that investors are now shifting their view from ‘Facebook is worth a lot of money’ to one that includes the view that ‘the Facebook ecosystem is worth a lot of money to other businesses’" says Basta. "Crucially, it’s the combination of the two that will meet the $100 billion level any time soon."

Facebook has managed to create an ecosystem of businesses that want to generate a profit from the site’s 900 million users.

Many of these businesses are beginning to generate revenues from being able to access the site’s large monthly user count which is growing at an annual growth rate of 132% since the site first started.

If Facebook wants to reach revenue levels it needs to justify its valuation it will need to change some of its focus from advertising to businesses.

"Much of the cash that the business itself generates is from advertising and it looks unlikely that this will get anywhere near the revenue levels required to justify the valuation," says Basta.

Please follow this author on Twitter @Tineka_S or comment below.


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