16 May 2012 09:00

Little room for error in Facebook valuation

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.

For more on this topic visit Tradingfloor

Post comment

Related debate

  • 1 week
  • 1 month
  • 1 Year
18 Dec
VELO
Gennemgang og analyse af Veloxis' søgsmålJeg har brugt min aften på at "hygge" mig med Veloxis netop..
66
20 Dec
 
Det er meget velbeskrevet i talrige bøger og artikler, at tilstandene i store dele af verden udenfor..
49
18 Dec
VWS
Normal 0 21 false false false DA X-NONE X-NONE ..
30
18 Dec
GEN
Med FDA´s godkendelse af Amgens (Micromet) godkendelse af Blincyto (blinatumomab), fik vi for alvor ..
27
18 Dec
PNDORA
Nu har jeg købt og solgt aktier i 8 år og var os her på debatten for 4-5 år siden men har glemt mit ..
24
18 Dec
 
  Jeg er gratist, jeg læser med på EI uden at skrive. Det er sjældent, man kan få gratis lunch; men ..
13
21 Dec
MY
Det er jo en ejendommelig debat, der er kommet ud af det spørgsmål. Der er jo ingen, der nogensinde ..
11
15 Dec
GEN
Genmab har afholdt bestyrelsesmøde og valgt at give bestyrelse, direktion og ledende medarbejdere op..
11
20 Dec
VWS
Kære Mena: Her definationen af et JV: http://da.wikipedia.org/wiki/Joint_venture   "Parterne er også..
10
20 Dec
VWS
Det er nemt at lave en hurtig statistik over perioden fra medio December til medio Januar, på basis ..
9

Tech Companies Send Criticism Along With NSA-Related Data -- Update

04/02/2014 00:06:00
By Danny Yadron Technology companies including Google Inc. and Microsoft Corp. released new figures on the amount of data requests they received from U.S. ..

U.S. Hot Stocks: Hot Stocks to Watch

03/02/2014 14:07:00
Among the companies with shares expected to actively trade in Monday's session is Herbalife Ltd. (HLF). Herbalife Ltd. (HLF) raised its fourth-quarter outl..

Pfizer Study Meets Primary Endpoints

03/02/2014 13:05:00
Pfizer Inc. (PFE) said Monday that a Phase 2 trial of its advanced breast cancer treatment met its primary endpoint. Pfizer said a study comparing the effec..

Most read news

  • 24 hours
  • 48 hours
  • 1 week

Copyright Euroinvestor A/S 2014   Disclaimer and Terms of Use
Quote information is delivered by Interactive Data.
Data is delayed 15-20 minutes according to the distribution agreements set by the different exchanges.
 
22 December 2014 02:42:13
(UTC) Dublin, Edinburgh, Lisbon, London
Version: LiveBranchBuild_20141211.1 - EUROWEB6 - 2014-12-22 03:42:13 - 2014-12-22 02:42:13 - 1000 - Website: OKAY