Facebook shares took a beating yesterday after Barron’s report valued them at $15 per share (compared to the current $20.8 and the IPO valuation of $38 in May). But I suspect that even this valuation is too high. Any share today which trades at more than 20 times earnings is not sustainable. Unless there is a very clear and well grounded prospect of improved earnings, even a 20 times valuation only creates a bubble – which will burst. I use 20 times as my “rule-of-thumb” for the long-term prospects of any technology company and the point at which I can always find a better investment.
The problem with future projections of Facebook earnings is that they have yet to establish a model for mobile earnings and their current pc base for earnings is declining. Not that I have much to invest, but without a clear way of improving earnings I do not think any price of more than $8 dollars per share is worth investing in. An added worry would be the Facebook propensity to hand out large amounts of restricted stock to its employees which only dilutes the value (itself doubtful) for other shareholders.
A personal opinion I have is that as ads get more intrusive they destroy the user-experience and will become counter-productive. Already there are sites that I avoid as a reaction to the ads which are so large, take up so much band-width and slow-down my access. And when a revenue model is dependent on increasing the irritation level with users, the model is flawed. I think the never-ending increase of ad revenues by increasing the number of users while increasing the intrusiveness of the ads can not happen. In fact I suspect that some advertisers are now losing sales because their ads – which may be brilliant in themselves – are now driving visitors away from the sites they are carried on.
So Barron’s valuation of $15 which would be 35 times earnings is certainly no level for me to enter – especially when the future earnings are still so much in doubt. At half that value at around $8 per share (around 18 times earnings) I could be persuaded to enter the Facebook market – though still with the risk that they may not succeed in finding the right earnings model.
Barron’s article ends with :
Stay away from the stock. It could be heading to the mid-teens.
To that I would add “and I won’t buy until it gets well into single figures”
Facebook‘s 40% plunge from its initial-public-offering price of $38 in May has millions of investors asking a single question: Is the stock a buy? The short answer is “No.” After a recent rally, to $23 from a low of $17.55, the stock trades at high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows.
The rapid shift in Facebook’s user base to mobile platforms—more than half of users now access the site on smartphones and tablets—appears to have caught the company by surprise. Facebook (ticker: FB) founder and CEO Mark Zuckerberg must find a way to monetize its mobile traffic because usage on traditional PCs, where the company makes virtually all of its money, is declining in its large and established markets. That trend isn’t likely to change.
Success in mobile is no sure thing. The small screens on these devices don’t give Facebook much room to configure ads without alienating users. ……
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AT ITS CURRENT QUOTE, Facebook trades at 47 times projected 2012 profit of 48 cents a share and 36 times estimated 2013 earnings of 63 cents. Compare that with Google and Apple, two proven technology growth stories, which both trade for about 16 times estimated 2012 earnings. Facebook is valued at $61 billion, or $53 billion excluding its estimated $8 billion in cash. That’s more than 10 times estimated 2012 revenue of $5 billion. Google trades for half that valuation.
What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street’s consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share.
That pro forma number is generous because it ignores Facebook’s very significant stock-based compensation. The company has been issuing gobs of restricted stock to engineers and other key employees in the hot Silicon Valley job market to prevent them from being lured away to the next hot tech start-up—the next Facebook.
Facebook issued $1.4 billion of restricted stock in 2011, or nearly $500,000 per employee. So far this year, the company has doled out $1 billion of restricted stock. Facebook’s reported stock-based compensation expense—based on the amortization of several years of stock grants—could total 20 cents a share next year. Subtract that from the 2013 consensus earnings number, and the shares trade at 50 times earnings. At $15 they would still be valued at a rich 35 times earnings. …..
Tags: Barron's Magazine, Facebook, Facebook shares, Mark Zuckerberg, Restricted stock
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