Facebook's worth: $15?

Barron's takes a shot at valuing the social-networking giant.

By InvestorPlace Sep 24, 2012 12:43PM

By Tom Taulli

iplogoUsually, CEO interviews mean little. But in the case of Facebook (FB), it seemed to be critical. Since Mark Zuckerberg gave an interview at the Disrupt conference a couple weeks ago, the stock's performance has been torrid, with gain of about 18%. Have investors gotten overeager?

That's the take of a recent piece in Barron's. It points out that Facebook’s valuation is at an unjustified premium. After all, the 2012 estimated price-to-earnings ratio is a hefty 47. Consider that Google (GOOG) and Apple (AAPL) have a multiple of 16x.

Based on this, Barron’s points out that a reasonable valuation for Facebook is $15. This is would be about 24 times the estimated 2013 profits.

Yet even this could prove to be too optimistic. Facebook’s revenues have been decelerating in 2012 because of the rapid shift to mobile. It’s true that the company is ramping up its monetization efforts -- such as with its Sponsored Stories (which are ads based on user comments) -- but it could take a while to get critical mass.

But there’s another big issue: the restricted stock overhang. To snag top-notch engineers, Facebook has had to issue huge amounts of its equity as compensation. However, this has two adverse effects. First, it results in a charge to earnings. According to Barron’s, this could mean that Facebook will trade at 35x earnings (assuming a stock price of $15).

What’s more, a decent amount of the stock will probably come onto the market, which could drag down the valuation. Hey, it’s not cheap to buy homes in Silicon Valley, right?

So on Oct. 29, there’ll be a lock-up expiration on 234 million shares. Then on Nov. 29, Facebook will allow 777 million additional shares to be sold. Already board member Peter Thiel has sold 80% of his holdings, while co-founder Dustin Moskovitz has sold about 5%.

Kind of scary? Actually, I still think Facebook has a bright future. With a user base of more than 950 million, the company will continue to be a major force. It should also figure out how to monetize mobile.

But for the next six months or so, investors need be cautious. The stock price could come under pressure because of the flood of shares hitting the market as well as the painful transition to mobile.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

More from InvestorPlace

Sep 24, 2012 3:03PM
You would wonder how FB stock hasn't taken a bigger dive today - makes me wonder who is buying to keep it up. Went up 18% after Zuckerberg spoke - and Facebook is becoming more and more abusive with its members - Google - are you listening?
Sep 24, 2012 3:44PM
I think Facebook is worth $3. That is exactly how it's buddy Bazinga... err... Zynga games stocks are worth... and that is my highest estimate.

Let me put it this way: One is a total waste of time run by a evil, smarmy, POS CEO who just copy and pastes other's ideas and only wants money by selling private data people involuntarily give.

The other... is the same thing, but is just named "Zynga".

Sep 24, 2012 4:08PM
Face book isn't even worth that.
The only thing they are trying to do to create revenue streams is
in devious information gathering.  Eventually that is going to piss
people off and they will stop using FB all together. For most people the fad
is over already.  I mean its just creepy the way they stock you for info.
Not that MSN is any different.
Sep 24, 2012 4:50PM

its only worth a penny


dont buy it for any more

Sep 25, 2012 9:09AM
Facebook is not worth anything.  I will never purchase service or goods via facebook.  I'm not even crazy about using facebook because of the privacy issues.  Why they or anyone thinks I want to share everything with the world.
Sep 25, 2012 11:33AM

Even $15 may be a stretch. Please remember that no one has actually found a good way to put Facebook to commercial use and advertisers are backing away from the heaps of cash there were once throwing at it. Add to that the upcoming flood of stock and you may have the recipe for the next penny stock.

Sep 24, 2012 4:03PM

My bad, says Facebook's marketing department.

Someone forgot to sign an advertising contract with Barron's.

Sep 24, 2012 3:33PM

Mark my words. FB will be like Goog, and Apple one day.. It will shoot to the stratosphere one day. All the suckers bought it high, but now is the time to accumulate this rocket launcher. People will get rich buying this stock.


Disclaimer:  I hate FB AND I hate what zucker stands for as a person.. I despise his personal character.

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