Facebook Stock is Undervalued (or is it?)

Someone asked me to take a look at Facebook’s stock this evening, so I took a page from Aswath Damordaran’s valuations class and did a quick equity analysis, borrowing a number of his assumptions. You can download my worksheet here (Dropbox Link).

My analysis generated an implied market cap of about $48 Bn.  The stock closed today with a market cap of $41 Bn. implying that the stock is slightly undervalued by the public markets.

So is it?

I’ll let you decide, but regardless it’s a very risky stock and the future for the company is hazy due to the nature of its business (online and mobile advertising) and the newness of the media (social). The same factors that make it a game-changer generate significant risk.  To me, doing a 10-year discounted cash flow analysis on Facebook is like trying to guess what cars will look like in 50 years,  you might have an idea but so many things can happen between now and then there’s really no telling.  With that being said, it’s helpful to ground the speculation with revenue and margin estimates. A few big questions to ask related to this:

  • Is the team going to figure out mobile advertising?  Effective CPM rates on mobile (the price to advertise)  are significantly lower than desktop
  • Is corporate management and communication going to level expectations with the public markets?  The ‘story’ has much to do with tech valuations.
  • Will users get bored and go elsewhere?

I’d love any comments on the approach, or any thoughts on Facebook’s stock value.

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6 thoughts on “Facebook Stock is Undervalued (or is it?)

    • I think sustainable cash flow and capatil growth are very important aspect of real estate investment. Interesting point, you have stated here about this topic. I very much appreciate your knowledge expressed through your article.

    • Thanks for the great question Jane. The best way of working out the appropriate scale is to sketch it out in advance of painting it in. I also like to imagine the size of trees or buildings as if a person was standing next to them. If one is in front of the other, a one point perspective comparison can be applied. Just ask yourself, while drawing in the objects, how tall would I be if I walked back and stood next to them? Also, be sure to look at the whole painting, not just the area where the building will be. Step back from the painting, this can greatly help in determining if the proportion and scale are working. Hope this helps a little. Richard

  1. I had a rather hard time choisong just one type of physician I would want to work for. So many of them fascinate me, and with me not really going into any medical field other than support, I never gave this any thought in the past. After reading the list, I am more favorable of working for a neonatologist. It is difficult to think about how neonatologist physicians sometimes have the most difficult job in the world, but I can only imagine how amazing it would be to be a part of saving a baby’s life. I had a coworker once whose baby was born at 36 weeks, and her baby had a lot of heart and lung problems. There were concerns about whether or not they would ever fully develop once she had him, but after many months in the NICU, and many scares that happened during it, the doctors were able to save him and he is now a very healthy 5 year old. It is because of that I have a higher interest in the neonatologist field.I hate to say which type of physician I would care less to work for, and it is because I worry that many will take it the wrong way. When I was 16, I used to help my mom at an assisted living home as a caregiver. We would get to work at 7:00 A.M. every morning to prepare breakfast for four of the elderly men and women that we were caring for. We would then make sure that all bedding was changed, rooms were cleaned, meals were prepared, and appointments were handled. We worked 12 hour days, and they were always grueling. The owner of the home made sure that everyone had their medicine and made it to their doctor appointments on time. However, she was more worried about getting paid for her services than actually helping the elderly. She would yell at them if they did something wrong, and even call them terrible names. My mom reported her and we both quit our job, but it has always left a sting in my heart since then. It is because of my experience with that situation that I do not think I could ever work for a gerontologist. I know that the situations would be much different, but ever since my experience with caring for elderly individuals it is very hard for me to think about assisting a physician in geriatrics because I worry that someone else might treat the elderly in the same way the owner of the home did. I am a firm believer that the elderly deserve the ultimate care and comfort when going through any treatment and aging in general, but I do not think I could ever work in that environment again.

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