In an equity theme that I wrote a couple of weeks ago, I pointed
out
how Facebook might turn out to be a winner stock - in terms of
providing a better return on investment relative to the market as a
whole. This judgement was based on the company's business case and
an expected valuation of $75 billion, which was based on the
assumption that weak markets would quell investor demand and drive
the price down. However, the latest news suggests that the IPO
values the company at $96 billion. I think that this is
over-optimistic, and that Facebook has misinterpreted market
sentiment, as
demand does not seem strong at the proposed valuation.
In my earlier article, I calculated that Facebook could return
17.2% annualised growth until Q1 2016 based on my expected
valuation contraction and earnings growth slowdown, which was
derived from the experience of Google shares. This model was based
on an IPO valuation of $75 billion and near-perfect execution of
its business plan. Using the current valuation of $96 billion, the
potential annualised return falls to 9.7% over the same period,
bringing the potential return closer to what you might expect by
investing in an index such as the S&P 500.
This gives a very small margin for error, an due to the fact
that there is a good chance the execution will not be completely
flawless, the annualised return could turn out to be even less. A
valuation of $96 billion is just too tight to justify the risk. As
I have already indicated, a valuation of $75 billion makes more
sense, and a valuation of $55-60 billion would be the ideal
valuation, as identified by fellow TradingFloor contributor
Matt
Bolduc.
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