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.