Tuesday, May 22, 2012

An Attempt at Valuing Facebook (FB) ... Remains Overvalued

Facebook (FB) is not a bad company, but we must say that it is overvalued, as we assumed it would be prior to it going public last week.

The Company’s revenues are driven by industry growth, more specifically growth in the social network advertising market, which we see growing at a 15% CAGR over the next five years.  Although the mobile advertising market is estimated to grow at a 40%+ 5-yr CAGR, it will remain a small portion of the overall online advertising market.

In addition to these markets, FB’s topline growth is driven by user growth, or as FB puts it, monthly average users (MAU).  However, mobile MAUs are growing faster, and as we mentioned early last week, this could be a negative for the Company as it isn’t yet generating significant ad or other types of revenues from its mobile platform.  Again, the mobile ad market does appear attractive, but we don’t think FB users are yet ready to embrace ads, etc. on their smartphones or tablets.  FB is trying various ways to monetize the users on the mobile platform.  For example, it is using sponsored stories, but the results of such a strategy remain to be seen.  Given such uncertainty, we discounted growth driven by the mobile ad market.

The payments & other fees revenue growth potential is pretty attractive.  FB may be successful in including ecommerce which then can enhance return on ads placed on FB, making them more attractive to advertisers and companies.  We have that segment going from a mere $557.0MM in FY ’11 to $3.2bil in FY ’16.  Overall, we’re seeing a 5-year 26.5% CAGR for payments & other fees revenues. 

FB is in a growth stage. While expanding and attempting to further monetize its 1bil-and-growing users, we will likely see margins decline during the next 12 – 18 months.  A summary of our top and bottom-line estimates is provided below, followed by our MAU and avg. quarterly ARPU (avg. revenue per user) projections. 

Now, let’s move on to valuation.  We currently value it at $27.69, which is 18.7% below its Monday closing price.  It is tough to value a company such as FB.  We tried to stay with the basics and used DCF.  We must note that we did make some pretty optimistic assumptions.  Our valuation, FB’s current market value, along with a comparison of some val multiples of other companies are provided below.  We note that our target makes FB’s val multiples pretty comparable to where the others are trading at.

In summary, as we mentioned a couple of times before the IPO last week, FB appears to have been overhyped.  Even after an 11.0% decline today, which puts it 10.5% below the $38.00/sh IPO price, FB remains overvalued.  If anyone needs additional detail regarding our estimates and the val model, let us know.

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