The real value of Facebook

A few weeks ago I thought about using my financial background for writing an article about the IPOcalypse created and started by Facebook (FB). Wondering why institutions would be so crazy to pay so much for so little track record. Fearing that some of those institutions were investing money others have been paying year over year for say….their retirement. Let’s hope not.

Anyway, I decided to do some basic – normal sense – calculations and come to some valuation of FB. It’s not much, I tell you.. So here’s what I calculated…

The real value of Facebook is 8 $

On Friday the 15th of May we saw it all happen; the much anticipated IPO of Facebook took place at an unbelievable stock price of 38 $, thus valuing the company at a staggering 100 billion $. Many experts have been wondering on a variety of platforms how on earth a company this young with such a little track record can be valued by professional institues like MorgenStanley at such a price.

Some have explained how and why FB has been prices this high. With only little revenue (3,7 billion $ and a profit of 1,7 billion $) the stockprice was somewhat 100 times the Earnings. And those figures need to be adjusted in some weeks when the pre IPO statement of FB to some selected investors will be made public. The FB statement was that the company faces declining earnings because of the ever growing usage of the FB platform by mobile devices.

Advertising income on the mobile platform is much lower than on the website. I would even say that advertising on the mobile platform is almost zero, as there are numerous apps that interact with the FB api’s and thus delivering often an even more user friendly interface totally focussed on the needs of the FB user and not the advertiser, even totally eliminating advertisements.

In a world where the winner of the people is the one that delivers something for free, like FB did and does, there’s hardly no solid profitable basement on which valuation can take place, aside from the online web based advertisement income.

The real value

To measure the real value of a company one has a variety of options. It can be asset based, as a mere bottom line valuation. One can project future incomes and calculate the net present value. In normal words: calculate the net profites for the upcoming 10 years, and take an intrest rate to calculate the accumulated profits as of now. The last method, and probably the most widely used one, is to use the current net profit and multiply it with a factor, representing the total accumulated profits for the coming years people expect the issuer to be able to achieve. Everything else being used as a valuation base is just wild guessing and blowing up a bubble.

The first method: net asset value. FB stockprice is worth 7 $

According to the balance sheets published with the IPO, FB owns a net value of roughly 7 Bn $. That’s it. But it’s not a fair base for stock price calculations, since it’s representing only the current – as is – value of the company without any goodwill, projected future earnings etcetera. Nevertheless, it’s the baseline when things go wrong.

The second method: net present value: FB stockprice is worth 10 $

With a current profit of 1,7 billion $, a coming warning to be published on june the 15th, it is hard to measure how profits will develop in the coming years. No mentions have been made how advertising income will rise the next  years, how FB will create business models that will monetize on the staggering 850 million user base. One thing is for sure: since we’re all assuming FB to be free, only little can be expected from some type of new user accounting, like LinkedIn does with Premium accounts. So since we’ve got nothing to compare with, no track record, we best take the current profit figures as the only one. So – normally – one takes 10 years in … and calculates the NPV. 17 billion USD, with a current interest rate of 3% will create a NPV of 12 billion $, representing a stock price of roughly 5 $. Worst case. Let’s take a more positive perspective, since this one is 1/8th of the IPO and looks a bit pessimistic. Suppose FB is able to increase it’s profits with 20% per year. Mind you, this means that in year 10 the profits would have grown to 1,2^9 x 1,7 billion = 8,52 billion USD. The NPV of that calculation would lead to a sum of (interest rate 5%) 32,6 billion $. Thus a stockprice of roughly 13 $. But mind you: this is based on the assumption that FB is able to increase profits (not just earnings) with 20% per year. Year after year each year. Just to compare: when 20% is too high and we go back to something like 15%, than the NPV decreases to 25 billion $, with a stock price of 8,8 $

Therefore, an average value in between would be somewhere near 10 $, representing a market cap of 22 billion $

The third method: FB is worth 6 $

The third method is based on the industry average P/E ratio, which is for most NASDAQ companies, say the more profitable ones like Google, Microsoft and Apple roughly 15 times the earnings. What is means that with a current valuation of 29 $, the P/E ratio is still – after such a fall in stock price – 75. Way over 15.
That last figure is a fifth of the current P/E ratio of Facebook, meaning that it’s stock price should – compared to industry average – be somewhere near 6 $. You’ll find stocks with P/E ratios of over 100 at NASDAQ’s listings, but then again, this can be based on the actual net asset value, or, more likely, the track record of previous earnings, meaning that shareholders have some confidence that although the actual earnings are low they will be higher in the coming years, thus valuating the company more on proven achievements in the past than current earnings.

Should the real stockprice of Facebook be 8 $?

The title of this post. Net present value of 10$ and a P/E ratio based value of 6$. But yet, stockprices are based on emotions. Emotions we cant fit into formulas and figures. Emotions that are hard to control and capture. Still, an IPO should be based on figures and measurements one can see, feel and reproduce. An IPO should reflect  the companies values and beliefs, since it’s the first major contact to and major contract with the financial public. You’ve only got one shot to do it right at an IPO. You win all credits or you loose it all. Certainly in the case of FB, with price drops immediately after the IPO, one can say they blew it. FB isnt worth 100 billion$ and in it’s current state it will never ever be. What has happened is that  FB was priced at the Future Value of  all projected profits, with yearly increases of over 25%. One should never pay a Future Price, because: what else can you earn with the share since you already paid the estimated future value of it? And with such a short track record, those estimated huge increases of net profits are a mere bubble blasting, underming thrust and belief in financial markets.

FB is worth, in my opinion, 8 USD per share now. Everything else, FB needs to prove it and let the shareholders share in it. That’s what the term says: we share our holds in the company. FB didn’t share much but took a lot

One Response to “The real value of Facebook”
  1. Steven Olson says:

    Simply wanna comment on few general things, The website layout is perfect, the articles is real good : D.

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