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
24 Jan
VWS
  På den lille ø Rügen ud for Stralsund i Tyskland var der under 2. verdenskrig en del af Hitlers vå..
25
21 Jan
 
Jeg har startet nedenstående debat: http://www.proinvestor.com/index.php?p=debat_1&postid=71068   Ha..
22
24 Jan
VWS
Jeg kan da ikke tale en skid op. Men jeg kan dele et overblik over selskabet som andre ikke har. Men..
19
21 Jan
GEN
I anledning af at Genmab er gået over 400 har jeg lavet et indlæg om forskellige forhold der kan dri..
18
24 Jan
VWS
I stedet for at bruge så mange kræfter på mig syntes jeg at du skulle bruge dem på at lave de kritis..
15
21 Jan
ATLA-DKK
Man skal ikke kaste med sten når man selv bor i glashus - tror du ved hvad jeg mener.   Og dit skriv..
15
22 Jan
E:ARCHER
Det var fandme da et flabet svar!   Hvad er du ikke fatter Goodwrench ? læs for helvede indlægget, s..
14
25 Jan
 
Hej folkens   I forbindelse med at jeg sidder og udbygger og (forhåbentligt) forbedrer på regnearket..
13
24 Jan
VWS
Donlupo - du forudsætter altså (uden videre argumentation) at Vestas markedsandel vil være faldende ..
13
24 Jan
VWS
En ny rapport vurdere at vi skal fra dagens globalt investerede aktivitet gå fra 364.9 GW i 2014 til..
13

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
1
Novartis Bexsero® vaccine approved by FDA for the prevention of meningitis B, the leading cause of bacterial meningitis in the US
2
Sika AG: FAMILY LOSES VOTING RIGHTS PRIVILEGE - 35% OF SHAREHOLDERS SUPPORT BOARD OF DIRECTORS' COURSE
3
Sanofi : Sanofi and Regeneron Announce Praluent(TM) (alirocumab) Biologics License Application has Been Accepted for Priority Review by US FDA
4
ALSTOM SA : Alstom and Thales to supply advanced CBTC signalling system to Hong Kong's seven metro lines
5
YIT adjusts its operations in Russia

Copyright Euroinvestor A/S 2015   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.
 
26 January 2015 12:24:22
(UTC) Dublin, Edinburgh, Lisbon, London
Version: LiveBranchBuild_20150121.1 - EUROWEB7 - 2015-01-26 13:24:22 - 2015-01-26 12:24:22 - 1000 - Website: OKAY