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Trying to Value Facebook

November 15, 2013 | About:
P.I.A.

P.I.A.

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Some of the sizzling stories in stocks involve businesses that are identified with the Internet. Examples include Priceline.com (PCLN), Netflix (NFLX), Amazon.com (AMZN) and Facebook (FB). The latter three have valuations so elevated that they may result in a sensation of cyanosis, as if from thin air. However, Facebook's platform enjoys such a vast, worldwide base of users that the corporation should be worth a great deal unless they somehow disappear, which is not foreseeable.

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.

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Also, perhaps not as important, minutes per user, exclusive of mobile, is stagnant.

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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?):

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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.


Rating: 3.3/5 (4 votes)

Comments

Crosshair
Crosshair - 8 months ago
EV/Sales-to-growth, EV/EBITDA-to-growth, EV/FCF-to-growth... was the aim here to develop ratios that show less than 1x, so to give the illusion of value?

P.I.A.
P.I.A. - 8 months ago
I appreciate the dialogue; in part, because it is helpful.

50% of weighting shown above is allocated to sales, while the company also generates some EBITDA and FCF.

Some sort of ratio involving users might lend to, or enhance, substance. Any multiples of R&D spending, as Jim Chanos has mentioned regarding Samsung, probably would not be so pertinent.

Facebook should not be disappearing. However, questions of value give the impression that one might be "Buying high" at this time.
AlbertaSunwapta
AlbertaSunwapta - 8 months ago
A bit of slip here? "The latter three have valuations so elevated that they may result in a sensation of cyanosis,"

P.I.A.
P.I.A. - 8 months ago
I am sorry AlbertaSunwapta as I can not make sense out of your comment?
TannorP
TannorP premium member - 8 months ago
I believe what he is saying is that he does not understand the difference of valuation between PCLN, NFLX, AMZN and FB while you stated "The latter three have valuations so elevated that they may result in a sensation of cyanosis,"

Essentially if the 1st three will give you a heart attack why wouldn't Facebook @ 50x earnings, 20x TTM Sales and 57x operating income?

P.I.A.
P.I.A. - 8 months ago
I like the comments!

UBS projects $1.23 in 2014 for Facebook, which is relevant to the stock's future, and I therefore find it pertinent to the current valuation. If you use ttm, then the P/E ratio is 120.9 (compared to $27.40 for Priceline)!

I have not tried replicating the spreadsheet copied in the article, but it is more sophisticated than what is included in some books and magazines. Whether you agree with it or not is a different matter; however, the framework is presented for replication if anyone chooses.

Based on 1 billion users, the market cap is 120x...

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