What's Facebook stock really worth?

If the social network can return to the margins it enjoyed before its IPO, we'll be looking at a company with solid opportunities for continued growth.

By TheStreet Staff Aug 23, 2012 9:44AM

By Dana Blankenhorn

 

I am a longtime Facebook (FB) bear.

 

I first predicted the social boom's bust in June 2011 in a column at Seeking Alpha. I even called the day of the bust in an April post: "The bubble starts to bust the day Facebook goes public."

 

But the busting of a boom is not always the end of the story. Weak players will go under, as companies like Pets.com did during the Internet bust. But for stronger companies -- and Facebook is the strongest social player out there -- value will be found, at some price, by someone.

 

As of Wednesday's close, Facebook was valued at about $42 billion. It should get even cheaper as investors digest how early investors like Peter Thiel are cashing out, as reported at Business Week.

 

By November, more than 1.7 billion shares will have been unlocked and become tradeable. Many, like Thiel's, will have been obtained at pennies per share or will have been grants to early employees. With no real basis in a stock with an iffy future, selling pressure will continue through the end of the year.

 

Still, there is value here. Take a look at Facebook's balance sheet and you will see $10.1 billion in cash and short-term investments as of June 30. The company booked $1.184 billion in revenue for that quarter. It had a huge run-up in administrative costs during that time, causing a loss, mostly related to going public, but it also had a huge increase in research investment during that same quarter, which is a good thing.

 

Michael Miller, a longtime PC Magazine editor whom I trust, noted in May that Facebook has built three big data centers on which it spent more than $860 million during the previous year. (See his article at PC Magazine.)

 

Facebook is using an open architecture for both hardware and software and is focused on managing its infrastructure at the lowest possible cost.

 

If Facebook can return to the 20% after-tax margins it enjoyed in its March quarter, before the IPO, and stabilize, you're looking at a company with annual sales of $5 billion, profits of $1 billion and real opportunities for continued growth.

 

Facebook bears may think of Yogi Berra's restaurant quote right now: "No one goes there anymore, it's too crowded." But Facebook does have loyal users, and it does provide services to them they can't get anywhere else.

 

Facebook also has a large staff of talented programmers and has opportunities for international and mobile growth.

 

Facebook is not going away.

 

But what's it worth?

 

Let's use a multiple of sales to come up with a valuation.

 

Let's also use Google (GOOG) for comparison.

 

Google has a market cap of $220 billion and had $44.6 billion of cash and short-term investments on its balance sheet as of June 30.

 

Subtract the cash from the market cap and you get $175.4 billion. Then divide that number by the company's revenue for the last fiscal year, which was $37.9 billion. You get a multiple of about 4.5.

 

If you consider Facebook the equal of Google as an investment proposition, you can use the same multiple.

 

Facebook has $10 billion in cash and $5 billion in annual sales. If you multiply 4.5 by $5 billion, you get $22.5 billion. Then add in the cash of $10 billion, and you get a Facebook valuation of $32.5 billion.

 

That's about 23% less than Facebook's recent market cap of $42 billion.

I'm going to round that percentage up to a nice 25%. That means Facebook is currently overvalued by about 25%.

 

That also means it's a "buy" at about $15 a share, roughly 25% lower than recent levels. But you're always going to overshoot in situations like this, and I see a market price of $13 a share, if CEO Mark Zuckerberg can hold things steady until it reaches that figure.

 

So by my back-of-the-envelope calculations, I'd buy Facebook at $13 sometime early in 2013.

 

More from TheStreet.com

16Comments
Aug 23, 2012 4:47PM
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" I first predicted the social boom's bust in June 2011".  Don't break your arm patting yourself on the back, Dana Blankenhorn - so did most of average-America.  It didn't take a rocket scientist to figure out that Facebook didn't have any financial value.
Aug 23, 2012 12:06PM
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As Facebook stock plummets, Mark Zuckberg asks for a loan from Jessie Eisenberg.  The article's on Hollywood and Swine.
Aug 23, 2012 5:59PM
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Have no use for Facebook or Twitter. Its stock not worth anything to me, I wudnt buy it. People who use Facebook do so because they dont have a life in the real world with real people in real time. They find it easier to talk to people the cant look in the eye.
Aug 23, 2012 4:25PM
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People constantly blame the president for the jobless situation, but isn't our country's capitalistic viewpoint to blame? Companies want to make money. Paying large salaries to workers when you can pay for the same skill sets at much lower cost in foreign countries just makes good business sense. Who is at fault? Even if companies didn't have to taxes, it still costs them money they could share with investors or, more importantly, stuff in their own pockets. Who can fault them for wanting to make the money? Even if it hurts us, the middle class.  Companies don't even want to offer full time hours, since that would mean paying benefits.  No one can fix this mess. Not Romney. Not Obama. NO ONE.

 

Oh, and Facebook is just another of those big companies that may turn out to have more bark than bite. It may pay off eventually, but for right now too much bad press (the truth about sell-offs) has made the stock like a pariah. I want to buy, but even I'm a little skeptical, although now that it's under $20 it might be a good time to buy.

Aug 23, 2012 5:21PM
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Why would anyone want to buy stock in nothing?  That is exactly what FB is, nothing.  There is nothing real, nothing anyone needs to survive on a daily basis, so in the end you are probably just as well off going to the casino or horse race and playing the odds. 
Aug 23, 2012 5:02PM
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more scam and lies from facebook  the are still in court for fraud and corruption  he sold over 1 billion shares to friends and private bankers before it was on the real share market other people was all ready in jail for it the keep there fig. up with bots all still in court for it and many more the hide from the law and government
Jan 30, 2014 10:45AM
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No one will probably read this old article reply, but in case the author does, you are an idiot. I bought at 19 because I knew that a company with that much money would figure out a way to keep making revenue. Even if I sell know , at over $60, I would be happy. I'll hold a little more. I love all these dimwits who act like they are the great stock prognosticators. LOL
Aug 23, 2012 4:14PM
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Comparing Facebook to Google is like comparing McDonald's to Quiznos. Where's your money bet?
Aug 23, 2012 6:41PM
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CAN''T WAIT TILL THE DEBATES CAUSE THEN OBAMA WILL HAVE TO TELL THE TRUTH IF THAT'S POSSIBLE FOR ANY CHICAGO BASED POLITICIAN.
Aug 23, 2012 6:38PM
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THIS MESSAGE TO ALL YOU ILLEGAL ALIENS GET THE SWIMSUIT READY AND START SWIMMING.CAUSE IF OBAMA LOSES YOU HAVE NO WHERE TO RUN TO NO WHERE TO HIDE.EXCEPT CHICAGO MOVE IN WITH OBAMA.
Aug 23, 2012 10:14AM
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The economy is in shambles! The middle class is worse off now than in 2008! Jobless claims are up and the creation of new jobs are not even being discussed by this president. His first "job creation scheme" in 2009 was a failure. This president has failed this country and will continue to do so until he is voted out of office in November and he will be voted out. 

I will assume that most of us that comment on politics are middle class just based on statistics as to the size of the middle class. How many of us can call ourselves wealthy? So, let's look at the facts and use our heads and not our hearts. The middle class is worse off today than just 3 years ago with him as our president. This president is overseeing the most negative presidential re-election campaign in history. He divides people, he does not unite people. Leaders don't blame others for their mistakes.  
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