In yesterday’s post, I reported, like so many others, that the Facebook IPO is in trouble. The IPO price was $38.00 per share, which valued Facebook at $104 billion. Yesterday’s post reported that Mark Hulbert had discussed a reasonable valuation of Facebook. In the post I said:
If Google’s P/E is 18x and Facebook’s earnings are $1.0 billion (net), the implied and simplistic valuation is $18 billion. I’m not attempting to value Facebook, but just doing a little bit of math here. Mark Hulbert, a columnist at MarketWatch, estimates the shares to be worth $13.80 per share, or a $38 billion market capitalization.
Hear what Hulbert has to say about this “valuation” here. Facebook closed at $28.84 per share yesterday (May 29, 2012), marking a 24% reduction in value since the IPO on March 18th. That’s real money, because that’s about $25 billion in reduced market capitalization. I thought I’d just do a little math to illustrate what Hulbert is talking about in suggesting that there might be further downward pressure on Facebook shares. The first table below reflects a number of assumptions:
- Facebook’s last twelve month revenues are $3.7 billion (fact).
- Facebook’s revenues are projected to grow at compound annual growth rates of from 25% to 50%, yielding a range of projected revenues from $11.3 billion and $28.2 billion five years out.
- Facebook is “valued” at Google’s approximate price/sales multiple of 5.0x. This is not a true valuation, but a relative valuation of sorts that assumes that Facebook would trade at Google’s multiple at the end of five years. This exercise creates a range of future values between $56.6 billion and $140.9 billion.
- Required rates of return (i.e., discount rates) ranging from 10% to 15% are considered, reflecting a fairly wide range of required returns for potential investors in Facebook shares. At the lowest discount rate of 10%, the present values across the range of projected growth rates begin at $35.2 billion and rise to $87.5 billion. At the highest discount rate of 15%, the present values range from $28.2 billion to $70.1 billion.
The range of potential “valuations” is quite wide. Focusing on the narrower range of discount rates ranging from 11% to 13% and five year growth rates ranging from 30% to 40%, we see a range of present values from a low of $37.4 billion to a high of $59.2 billion. Compare this range with the opening IPO market capitalization of $104 billion and the closing market capitalization yesterday of $79 billion (based on estimated shares of 2.74 billion and closing price of $28.84 per share).
What do these calculations have to say about the price of Facebook shares? Mark Hulbert reached a single-point conclusion of $13.80 per share in the discussion above based on a similar analysis.
The calculations show a range of prices per share for Facebook – under the assumptions above – from $10.27 per share (upper right) and $31.93 per share (lower left). The center, highlighted range of 11% to 13% discount rates and 30% to 40% growth show a narrower range, from $$13.65 per share to $21.61 per share.
At a trading price this morning of approximately $29 per share, the above calculations would imply that Facebook shares may face continuing pressure unless the market can capture a vision of very rapid revenue growth in revenues (and earnings) at relatively low risk.
I would be remiss to state that the above is an exercise in valuation logic and is not meant to be investment advice in any way. In yesterday’s post, I asked if anyone had “done the math.” In today’s post, I did a little math. Interesting.