Lifetime Value (LTV) is a tool used in marketing to estimate how much a customer is worth over the entire time the customer remains with the company.  Bill Gurley, the author of the Above the Crowd blog, wrote an interesting post a while ago on the LTV formula and discussed several of its pitfalls.  In "The Dangerous Seduction of the Lifetime Value (LTV) Formula" he lists 10 reasons to "avoid worshiping at the LTV altar":

1. LTV is a tool, not a strategy.
2. The LTV model is used to rationalize marketing spending.
3. The model is confused and misused.
4. The formula is not absolute.  It's at best a good guess.
5. The LTV variables "tug" at one another.  The variables in the LTV equation are interdependent, not independent.
6. Growing becomes a grind.  Investing heavily in marketing doesn't necessarily lead to a commensurate drop in subscriber acquisition costs.
7. Purchased customers underperform organic on almost every metric.
8. The money could go to the customer to provide a better value proposition to the customer and to provide a better customer experience.
9. LTV obsession creates blinders.  Companies that obsess over LTV can become overwhelmed by it, whereas scrappy companies can find more efficient forms of marketing.  Bill uses a great example here.
10. Tomorrow never arrives.  It's difficult to create permanent equity value with LTV.

Here's the link:  http://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-formula/
Also, some of the comments are very interesting.

J.J. Colao of Forbes, provided a defense of LTV in "In Defense Of The Lifetime Value (LTV) Formula."  The article points out that with the proper oversight, LTV can be effective.  It also provides a very interesting real-life example.  The article offers five tips for effectively applying the LTV formula in a business:

1. Prize customer experience above all else.
2. Keep the variables clean.
3. Isolate customer segments, and then apply the formula.
4. Don't rely on conventional marketing.  Use a variety of marketing approaches, such as viral, social and PR.
5. Maximize LTV to a point, then scale.

Here's the link:  
http://www.forbes.com/sites/jjcolao/2012/09/13/a-dangerous-seduction-revisited-in-defense-of-the-lifetime-value-ltv-formula/

Facebook's stock is currently trading at roughly $31.50 per share.  It priced its initial public offering a week ago at $38 per share, opened trading at $42.05 per share and traded as high as $45 per share.  None of Facebook's underwriters have initiated equity research coverage on Facebook, but a number of analysts not involved in the offering have, with a range of target prices of $49 all the way down to $9.50 (see article here).  In addition, Henry Blodget, former Internet equity research analyst, estimates that Facebook should trade between $16 and $24 per share.

Link to Henry Blodget article (which has a good analysis):  
http://www.businessinsider.com/what-is-facebook-worth-2012-5

Link to CNBC article on analyst projections:  
http://www.cnbc.com/id/47567766 

There are conflicting reports of Facebook's valuation at its initial public offering.  The Wall Street Journal reports an IPO valuation of $96 billion; Forbes indicates the IPO market cap is $86 billion; my prior post on the matter estimates an IPO market cap of $75 billion.  What gives?  Basically there are two reasons for the difference.  First is the difference between "market capitalization" and "valuation."  Second is how these terms are calculated, which in Facebook's case primarily relates to the issue of how to treat options and similar instruments.

"Market capitalization" or "market cap" is basically the stock price multiplied by the number of shares currently outstanding.  In Facebook's case, the targeted IPO stock price is between $28 and $35 dollars (according to its registration statement - see prospectus cover page),  and it will have  2,138,085,037 shares outstanding after the IPO.  This gives an IPO market cap of $59.9 billion at the low end of the range ($28 per share), $67.3 billion at the mid-point of the range ($31.50 per share), and $74.8 billion at the top of the range ($35 per share).  My post used the high end of the range to calculate Facebook's IPO market cap.

Market cap has a drawback in that it does not take into account the impact of stock options and the like, which when exercised adds to the number of shares outstanding.  In Facebook's case, page 42 of the prospectus indicates there are potentially a total of nearly 681 million shares which could possibly be exercised at some point in the future and added to the 2.1 billion outstanding.  This includes 378 million shares pursuant to restricted stock grants, 116 million shares through Class B stock options, 60 million from a stock option issued to Mark Zuckerberg, 25 million shares from recent option grants and stock issuances, 23 million shares to be issued to Instagram when the acquisition closes, and another 77 million shares that could be issued in the future under equity compensation plans.  Backing out the 77 million reserved for future issuances (because this may or may not be issued), the total becomes 603 million shares that could be issued from exercises of stock options, etc.  Assuming that all of these shares are issued (which is unrealistic, but provides an upper end to the range), total shares outstanding on a "fully-diluted" basis are 2,741,567,754, which multiplied by $35 per share (the top of the IPO price range) gives a "fully-diluted" valuation of nearly $96 billion.  This is what The Wall Street Journal reports for the IPO valuation.  At the mid-point of the range, the fully-diluted equity valuation is $86 billion, which is what Forbes is reporting.  In my opinion, Forbes should not have used the term "market cap" in the title of the article as what it refers to in the article is fully-diluted equity value.

Now the corporate finance purists will say that the above analysis is incorrect, because it does not take into account the strike prices of the options.  This is true - the above is a quick and dirty analysis.  However, because the strike prices are very low (6 cents for the Zuckerberg option) and 95 cents for the Class B options, calculating the option shares using the Treasury method won't have a material effect on the above analysis.  Also, some purists will say that the valuation should be "enterprise value" and they would be correct, but that's a topic for a future post.

Links:
Facebook S-1/A registration statement:  http://www.sec.gov/Archives/edgar/data/1326801/000119312512208192/d287954ds1a.htm 

The Wall Street Journal article:  
http://online.wsj.com/article/SB10001424052702304746604577382210530114498.html 

Forbes article:  
http://www.forbes.com/sites/tomiogeron/2012/05/03/facebook-seeking-ipo-with-market-cap-of-86-billion/ 

My prior post:  
http://www.allenlatta.com/1/post/2012/05/facebook-files-targeted-ipo-price-range.html