Trying to Value Facebook
Having a market cap of approximately $120 billion, Facebook prioritizes user growth and engagement over short-term financial results. It follows that metrics that tally participation are important toward its assessment as a growing company. The company predicts a decline in user and revenue growth rates over time as the size of its active user base increases and as higher market penetration rates are achieved. Facebook's daily active users who use personal computers have declined modestly year over year. The corporation anticipates the rate of growth of mobile users to be its driver for acceleration of earnings and revenues. Mobile users are monetized at a lower rate.
In Nov. 11 commentary, Goldman Sachs Research includes some graphics that display comScore data for October. Unique desktop visits are down and it may be attributed to rising mobile figures.
Also, perhaps not as important, minutes per user, exclusive of mobile, is stagnant.
The numbers shown may belie utility for advertisers, who are the site's customers. Facebook shares are now approximately 11% beneath their 52-week high. At $49 a case can be still be made for them on behalf of those who like the company, as there have been several recent guru buys.
In well-presented Oct. 31 research, UBS reiterates a Buy rating on the equity, in place since July 1 when shares traded at around $30, and increases its 12-month price target from $60 to $62. The investment bank considers the stock to be "the best pure play on digital advertising trends." It is impressed by price per ad growth, believing it underscores value to advertisers who are obtaining high ROIs on the platform. To use my own terms, Facebook has pricing power.
UBS Also Sees
“Multiple product launches in the coming year (News Feed video ads, Instagram advertising & mobile retargeting) as improving current CPMs & resulting in even larger ad budget allocations for FB from large brand advertisers.”
Only $1.23 in EPS is predicted for 2014, so the stock is forecast to trade at a 50x multiple. To actually explain the share price, the firm uses a complicated, blended valuation methodology that is thorough (notice the bottom row under valuation for each boxed section?):
Facebook has appeal because of its enormous, global user base. Further, an argument can be made that ROI for advertisers is a reason for upside. It has other future prospects as well. Though the company’s valuation can be viewed as stratospheric, an explanation for it implies that its stock can appreciate.