Is Facebook Worth $15 A Share Rather Than $85?

As an old saying goes, a bird in the hand is worth two in the bush: I tend to keep that in mind when I delve into the valuation of stocks, company’s balance sheets and growth prospects.

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Flying Cat

There’s been lots of talk about FB’s latest strategic moves in recent times — you read it here, here and here. FB’s launching new products, and is keeping staff busy — in fact, virtually every Hedge update from our team includes news or rumours about new features and launches.

Similarly, the performance of its stock hasn’t passed unnoticed.

FB currently trades at $85.8, or 4% below its 52-week record high of $89.4 that was hit on 25 June. Since its IPO at $38 in May 2012, its market cap has risen so fast that its equity value now stands at $242bn — its performance since it listed reads +124%, while two-year gains for shareholders are in the region of +230%.

Consensus estimates place its stock on a price target that is some $12 above its current stock price of $85, for a 14% implied pre-tax upside, but diminishing returns have become more likely — that’s been the case since the end of October, anyway, when the shares changed hands at $80.

Engagement Risk & Assets

The competitive landscape is incredibly tough, as we gather from the daily news flow and sources. Engagement risk is a serious threat, and could hurt FB in two ways:

  • Users will try and experience alternative platforms, with teens opting for more appealing social features.
  • FB will pay over the odds to secure any asset that competes directly with it, just as it has done in recent times.

In spite of fierce competition and likely rising investment requirements, Its stock trades on a forward net earnings multiple of 85x.

If you think that’s a lot, you may not be familiar with FB’s income statement: if FB continues to grow in line with consensus estimates, its stock could well be worth $150 a share before a split takes place in 2018 or earlier.

FB boasts a strong net cash position, hefty operating margins, and if it actually manages to hit revenues of $30bn in 2017, it’ll have grown its top-line and net earnings at a CAGR of 43% and 166%, respectively, between 2012 and 2017.

I have other concerns, though.

Its current assets are worth $15bn, or about 35% of its total assets at $42bn.

It doesn’t take a professional investor to understand that FB is grossly overvalued on this basis. While its total assets are worth $15 a share, it would likely carry a liquidation value of about $5 a share.

A 3x multiplier suggests a valuation of between $15 and $45.

What this also means is that if FB misses growth estimates, its stock could fall like a stone back to around the level that it recorded soon after its IPO.

We’ll know more at its next trading update, which is due on 29 July.

(Alessandro Pasetti and Hedging Beta are not invested in FB or in any of the shares mentioned in this article.)

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