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A Rough Estimation of Facebook's Intrinsic Value

May 21, 2012 | About: FB +0% BRK.A +0%
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Bud Labitan and Natalja Callah

budlab

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Starting with a base estimate of annual Free Cash Flow at a value of approximately $950,000,000 and the number of shares outstanding at 2,140,000,000 shares; we used an assumed FCF annual growth of 15 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here:
[quicktake.morningstar.com]

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $11.14.

Market Price = $34.03 and Intrinsic Value = $11.14 (estimated)

I used a discount rate of 6.25% and the moat appears to be narrow and shallow. The moat can last as long as Google or Yahoo or Microsoft do not design a friendlier website. Once one of the big cloud providers designs a friendlier interface, the moat starts eroding.

For example, if Google+ was easier to use, and it added features like a friendlier eBay style trading, barter or consulting, it could take the lead. Thus far Google+ is too cumbersome and geeky to be useful. However, they are trying to make it better.

Bud Labitan
Author of "The Four Filters Invention of Warren Buffett & Charlie Munger" and "Moats: The Competitive Advantages of Buffett & Munger Businesses"

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What Worked in the Stock Market for Long-Term Investors?

Extensive research has found that the companies with predictable revenues and earnings outperform the market average; they also suffer lower probability of loss. As a matter of fact, this kind of companies are exactly what Warren Buffett wants to buy and hold forever. Please read the research about what worked in the stock market:

Part I: What worked in the market from 1998-2008? Part I: Predictability Rank
Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety


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Comments

kfh227
Kfh227 premium member - 1 year ago
company has no debt if memory serves so add in cash/equivilents at a minimum to intrinsic value.some would actually add total equity instead in a zero debt situation.please factor this into your iv calc
budlab
Budlab - 1 year ago
FB shares outstanding = 2,140,000,000



budlab
Budlab - 1 year ago
"Invert, always invert." said Charlie Munger. I read somewhere long ago that Warren Buffett would sometimes pay as much as 10 times earnings for a good business. So, as a goofy exercise, I took the $950,000,000 x 10; then divided by the 2,140,000,000 shares and got a per share price of $4.44 and, interestingly, this is about 50% of my rough estimation of their intrinsic value. Since Buffett likes to buy around a 50% discount to intrinsic value, can we say he would be interested at $4.44 ? The "business" must be understandable, have "enduring" competitive advantages, able and trustworthy managers, and a bargain price relative to "intrinsic value per share."
kfh227
Kfh227 premium member - 1 year ago

NPR had something interesting about hte threat to facebook.

most of their revenue comes from advertising that occurs i na web browser. As people move more and more towards smart phones and apps, the advertising model could break. Facebook has yet to figure out how to monetize facebook from a smartphone app standpoint.

I also tinkered with number:
1) Woudl not touch this stock
2) Assumieng (1) were false ... $16B is fair value. Not $100B. Nice to see FB crashing as I speak.
johnheiderscheit
Johnheiderscheit - 1 year ago

I think the FB offering is going to end up with the May 2010 Flash Crash as a major long term impediment to getting retail investors interested in owning stocks.

Also, I think the discount rate you use (6.25%) is way too low. I would never use less than 10% for a moderate moat business.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Ahhh, but can they pull an AOL and now use their overpriced shares to buy companies to boost their real intrinsic value.
batbeer2
Batbeer2 premium member - 1 year ago
Why are people discussing the moat and not the business it surrounds ?
Bill.Smith
Bill.Smith premium member - 1 year ago
Hey, Batbeer: I'll second that, and add--is there enough operating history to establish that they are able, competent, trustworthy, and have the presence of a moat? I'm thinking not.

In my book, IPO = initially probably overpriced

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