May 29, 2012
Where were all those analysts before Facebook (FB) went public?
You know the ones I’m talking about – the ones who are suddenly saying that Facebook is worth less than $60 billion, or about $21 a share, and perhaps as little as $30 billion. Even after a three-day weekend in the U.S. to celebrate the sacrifices the military has made to protect our freedom, a few of us may still remember the sacrifice made on the altar of capitalism when Facebook sold shares in the public markets for the first time at a whopping $38 – or about $104 billion. That was a mere 10 days ago.
To be fair, from the moment Facebook announced plans to sell stock to the public in February, most professionals laughed at its presumptive valuation around $100 billion. That price hadn’t been pulled out of thin air. In private markets where Facebook shares traded hands among institutional investors and high net worth individual investors, the price touched $45 before the regulators said no more trading in March.
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The consensus among the pros was that the deal was worth about $70 billion to $75 billion, or or about $25 to $27 a share on a diluted basis (that is, if you count all the shares that could be conjured into existence from stock options and such). I found a handful of pros who thought the deal was worth upwards of $135 billion. I dug up one outlier who said it was worth $30 billion – and almost didn’t include the work of Alexander Chepakovich at istockResearch.com.
Now that the stock has bombed – down to around $30 this morning, off more than 18 percent from its IPO and 28 percent from its high – analysts are suddenly saying, yeah, that’s right. The stock is worth about half its price, at most. Mark Hulbert, a columnist at MarketWatch, penned a column last Friday to show that the shares are in fact (drum roll, please) worth only $13.80 each, or about $38 billion for the company. Hulbert used a recent study of Internet-era IPOs by a trio of academics and some “back-of-the-envelope calculations” to determine a “fair price” for Facebook shares. And, as Alan Abelson of Barron’s noted, that “doesn't even mention all the baggage [Facebook] totes around in the form of lawsuits, regulatory investigations, and those screechy sounds emanating from Congress.”
Earlier in the week, Thomson Reuters Starmine service pegged the stock a reasonable value at $9.59, about one-third the current price and one-quarter of the IPO price.
So even after a wild week of trading, the question bugging investors everywhere remains: What is Facebook really worth?
Analysts at the banks that underwrote Facebook’s IPO can’t publish their proprietary forecasts and targets for the company for 40 days, meaning it will still be several weeks before we see how they answer that question. But in general, when professional analysts sit down to slap a value on a company they look at the past to project the future. Hulbert, for one example, used data on how previous IPOs have grown to estimate Facebook’s future path. But how you look at Facebook’s raw data – the growth of mobile users or ad revenues or its virtual currency, Facebook Credits – turns out to be something of a Rorschach test. Are you a realist or a dreamer?
The realists base their financial projections on the business that is in front of them now (more or less) and the dreamers envision a company that creates revenue streams that are much more diversified than they are now. The first camp sees Facebook as an advertising machine that needs a great deal more oiling. The second camp sees Facebook as a pioneering business that at some point in the non-too-distant future will reap the rewards of business creativity that extends Facebook’s reach beyond advertising. But even before the IPO disaster struck, there was a very wide range of views. In the days since, the divergence of opinions has been stark, from the Starmine target below $10 to Tom Forte of Telsey Advisory Group, who has a $49 target (and, not surprisingly, a “buy” rating).
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The valuations a few months ago were much more optimistic. In February, people like Aswath Damodaran, professor of finance at the Stern School of Business at New York University, and Henry Blodget, the publisher of Business Insider and a former Internet stock analyst, were skeptical. They pegged the value back then around $70 billion – although they said that with a bit of imagination it could be pushed up to $100 billion. They, however, would not invest at that high a valuation. Damodaran questioned whether Facebook’s more than 900 million users – expected to pass 1 billion in the next year – were really worth about $100 each, as implied by a $100 billion valuation for the company:
“Social media companies today collectively and Facebook in particular resemble stores with tremendous foot traffic (850 million users in the case of Facebook) but with nothing on the shelves. You are buying access to the foot traffic and hoping that you can get something on the shelves that they will stop and look at and buy. Given that social media is still in its infancy, we really don’t know whether this promise will pan out, and that remains the basis for the uncertainty, and why short cuts that are based on value per member (a metric that I see with social media companies all the time) are fraught with danger.”
Blodget thought that if Facebook could reap $7 billion in 2013 – which is no longer expected – then it might be reasonable for the stock to trade at 10 times revenues, or $70 billion. A little high, but not out of this world.
Blodget has since taken a different spin on Facebook, measuring its stock price against its per share earnings, known as the price-earnings ratio. In this case, Facebook looks ridiculous when compared to Apple, which trades at 10 times projected 2013 earnings, and Google, trading at 12 times 2013 estimates. If Facebook earns $1 per share in 2013, then its P/E on today’s price is about 30. If it earns just 40 cents, as research firm BTIG expects, then the P/E jumps to 78.
That seems too rich. So Blodget concludes that Facebook, with more modest growth projections, could fairly trade at 20 to 30 times 2013 earnings, which he says gives the stock a fair value of $16 to $24 a share.
The problem underpinning all these various numbers is the inherent uncertainty about Facebook’s growth prospects – an uncertainty that allows “dreamers” to see plenty of upside where “realists” are more cautious.
“We believe that money follows times,” Needham & Co. analyst Laura Martin wrote last week in establishing a $40 price target and a “Buy” rating on Facebook. Facebook represents about 14 percent of times spent online worldwide, Martin noted, “suggesting that its revenue potential is $14B globally and $6B from the U.S. alone.”
Or in some cases, analysts buy the dream but suggest waiting for those expectations to come to fruition. “Facebook is building the foundation to revolutionize online advertising,” Morningstar’s Rick Summer wrote last week, reiterating his $32 fair value estimate for the stock. “However, lack of near-term visibility and cloudy advertising metrics may temporarily stall revenue and profit growth.”
Summer advises investors to avoid the stock for now, writing: “We still believe the company is likely to disappoint investors for the next several quarters.”
Hey, guys: Where were you before?
Nancy Miller is the author of the e-book The Facebook IPO Primer.