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What are the techniques do you think are used in valuing Instagram and what are the variables considered in reaching to this amount? Also, how can we know the techniques used in the valuation by Citibank?
I’m asking for the sake of education*
I will give you my answer (even though this is not in the ‘Ask the Tutor Forum’ 🙂 )
The value based on a business is generally determined by the future expectations. Even if a business has made continual losses in the past then if it is expected to make high profits in the future it will have a high value, and conversely even if it has made high profits in the past then if it is expected to make losses in the future then it will have little value.
In the case of Instagram, it is now bigger than Twitter in terms of numbers of users. So far it has not had too much advertising revenue but is expected to increase it. As a result, Citibank are expected its advertising revenue to grow substantially and therefore its profits to grow in the future. This article summarises it quite nicely:https://www.forbes.com/sites/steveschaefer/2014/12/19/instagram-worth-35-billion-facebook-stock-91-citi-says/
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