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Valuation of Facebook Looks Pricey, for Now

May 23, 2012 | About:
"Price is what you pay, value is what you get." — Warren Buffett

Not since Google have I seen an initial public offering (IPO) have so much hype around it. At the same time, I don't think I have seen an (IPO) go so wrong. Despite the hype, things started to look rocky from the very beginning and it didn't take a genius to figure things out. Before the IPO, Facebook had released its financials via an SEC filing and as much as I played with the numbers, there is no way Facebook could justify a $100 billion valuation.

What Facebook has going for it

$100 billion valuation or not, Facebook has 900 million monthly active users and is by far the largest social media website. This is huge and in my opinion is the reason such a high valuation is given to it as the potential advertising opportunities can be huge. But that's exactly where things get tricky. Facebook has not found the formula to effectively monetize its user base and advertisers aren't exactly jumping ships from Google to Facebook. As a Facebook user for the past three years or so, I have yet to purchase anything from Facebook, and don't personally know anyone who has even clicked on any of the ads. If anything, I pay more attention to a company's "page" for coupons and news.

Valuation of Facebook

First thing first: There is no way you can predict what Facebook will look like five years from now, let alone ten years from now. Anybody doing a discounted cash flow (DCF) analysis is simply punching in numbers and not doing any kind of analysis. While we can't predict the future, we can compare Facebook's numbers with the likes of Amazon (AMZN) and Google (GOOG). To do so, I did a Ben Graham-style stock comparison exercise.

Valuation of Facebook

Several interesting things become apparent after doing the stock comparison. First, as of today, Mr. Market is giving a higher valuation to Facebook over Amazon.com, despite Amazon having 12.75 times the revenue of Facebook. Sure Amazon has been around longer, but it is still considered a growth stock.

Second, Facebook is valued at almost exactly half of Google, who many consider its main rival, as both will compete in not only advertising dollars, but active users since Google continues to expand and promote its own social network, Google+. But, when compared to Google, it just proves how overvalued Facebook currently is. Google has almost 10 times the revenue and 10 times the earnings and trades at lower valuation ratios than Facebook.

Finally, Facebook's earnings yield is at 2.50%. At the same time, current 10-year Treasury rates are 1.75%. You essentially get almost the same yield, except you take no risks with Treasuries (stay away from them).

Disclaimer: None

About the author:

Alex Garcia
Alejandro Garcia, B.S. Business Admin-Option in Finance, is a private value investor who uses his blog as a means to write about his experience with Joel Greenblatt's Magic Formula

Visit Alex Garcia's Website


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