I have had requests to give my opinion on Facebook’s stock performance as the stock has fallen 50% since it’s IPO three months ago. Though I am no expert on corporate valuation and have no proven ability to pick on stocks, this one has piqued by interest and hence here are a few observations:
Facebook stock could still go lower: At the current price of $20, Facebook still trades at 31X the next year’s projected earnings per share of $0.65. Google trades at at 14X next year’s earnings. So, in the near term, Facebook’s price is expected to still go further. Moreover with Facebook’s employee lockup shares due to release in October and November, the market perhaps has already factored in that event.
Limited information: Since going IPO, all that we have is one quarterly earnings report released last month. The report undoubtedly surprised the market as it had less revenue growth than expected and an operational loss due to share compensation expenses. The user base has not shrunk and there’s no imminent competition. Moreover the business model is still unclear—is it just an advertising platform or something more?
Insiders selling out: Much has been made out about the insiders like Peter Thiel ( a long time investor) selling close to 36 million shares at an average selling price of $20 a share. Now while this is true, this could be anticipated. The early investors are just converting their paper gains to real gains and managing their portfolio mix and their selling out is contributing to more sales.
Multiples drop though earnings could grow: The market is over estimating Facebook’s growth prospects and as the business model becomes more clear, there will be a sobering effect. Now, this has been seen in several instances, most notably of Google (see chart below):
In my view, Facebook remains an excellent company and as Mark says, “committed to long term growth”. It is difficult to assess a fair valuation given that there’s no standard business model and hence most investors are reacting to news. Good news get magnified and bad news contributes to further sell-offs.
So, what exactly is the fair price for the stock? I still don’t know the answer.
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