

Facebook’s stock should trade for $13.80 - xickan
http://www.marketwatch.com/story/facebooks-stock-should-trade-for-1380-2012-05-25

======
cageface
_The researchers found that the revenue of the average company going public
between 1996 and 2010 grew by 212% over the five years after its IPO._

 _Assuming that its five-year return is equal to the stock market’s long-term
average return of 11% annualized, Facebook shares currently would need to be
trading at just $13.80._

I'm as bearish as anybody on FB but this seems like extremely lazy analysis.
FB may be many things but average is certainly not one of them.

~~~
tokenadult
_FB may be many things but average is certainly not one of them._

Several of the other comments you have received relate to this idea, so please
allow me to ask a specific question (directed both to you and to onlookers).
What is not average about Facebook? For some commenting here, the specific
question I have is what is above average about Facebook, related to its
revenue, to suggest it will overperform the average of historic experience of
companies that have IPOed? As an investor, interested in a non-lazy analysis,
what should I look for to decide whether or not Facebook is a good investment
at the current price of its stock? I note that you wrote,

 _I'm as bearish as anybody on FB but this seems like extremely lazy
analysis._

so I'm not specifically asking you for a rationale for buying Facebook. Other
comments at this comment level or below imply that there may be a rationale
(perhaps unconvincing to you, but perhaps convincing to some onlooker) for
buying Facebook's stock at today's price. What rationale is that? If I had
some extra money, would I be well advised to invest it in Facebook stock? Why
or why not?

I'd appreciate hearing from anyone who has an analysis that goes deeper than
the news headlines of the last week since the Facebook IPO. Thanks.

~~~
daguar
Well, the analytical question here is: what is the appropriate sample for
comparison?

The article uses US IPOs 1996-2010 as the initial sample. I'd like to know how
sensitive this is to expanding or narrowing that range. How does that average
change if you adjust the range? (The academic article may have some note of
this.)

Then, the article makes comparison to Google's current price-to-sales ratio as
a benchmark (5.51-1). The analytic justification is nothing more than "[s]ince
Facebook FB -0.64% is most often compared to Google GOOG -0.66%..."

Some questions I'd ask about this:

\- What did Google's P/S ratio look like at IPO, and what was its growth?

\- What does Facebook's P/S ratio look like compared a broader sample of tech
companies' P/S ratios? Or including non-tech companies?

\- Why not use price-to-earnings ratio? (I'm not a finance guy, but the subtle
difference in wording here gives me pause to at least investigate the
question.)

So what you're hearing me say is: we need sensitivity analysis. The assumed
benchmarks appear arbitrary enough that we have to see how the results change
when you adjust the inputs.

Lastly, there's the age-old fundamentals versus intangibles question:
investors make their decisions based on both. The fundamental analysis (of
earnings, etc., like the article does) is not deterministic: it just gives you
context. Intangibles (faith in management, broader understanding of how the
market will shift and affect the firm's competitive position) matter, too.
They're just, well, intangible.

But also included under the umbrella of intangibles is how _investor
sentiment_ toward the company may change. If people think FB is going to make
some huge announcements in the next year that will send the share price
skyrocketing for a short (but not sustainable) high watermark, then that
potential short-term return is worth buying.

[Edit 5/25 6:57a PT - changed range from 96-00 to 96-10 based on correction.
Thanks!]

~~~
brightrhino
The article says the analysis uses the 1996-2010 timeframe, not 2000, so that
is a few more IPO's.

------
onetwothreefour
Facebook should trade for what Facebook is trading at at the moment in time
Facebook is trading.

The end.

~~~
bluedanieru
Wow. That's so insightful, I think you've single-handedly rendered every
research division at every investment bank obsolete. Consider switching
careers.

"This company is trading at this price, which is appropriate because this
price is what the company is trading at. My recommendation is to purchase
shares in this company then sell them at a higher price later on. Alternately,
we can short this company's stock, and then profit when the price falls."

~~~
namityadav
I think he's pointing to <http://en.wikipedia.org/wiki/Efficient-
market_hypothesis>

~~~
maigret
Yes, but as someone said, "the market can stay irrational longer than you can
stay solvent".

~~~
vinutheraj
John Maynard Keynes said that.

~~~
maigret
Thanks for the heads up! I thought it was some anonymous on Twitter ;)

------
tybris
A quick collapse of the price would be best for everyone, except for the
"muppets" who bought FB shares in the IPO. Especially for Facebook, who would
otherwise see an exodus of employees who can make more in terms of vesting
credit at companies whose share price does go up. I do think a market cap of
>$50 billion is sustainable based on the size of the warchests at Microsoft
and Apple. If they could only ever buy one company, it would be Facebook.

------
SuperChihuahua
Ive never seen so many bearish articles about a company before. That's
probably a good sign if you are bullish on FB... Here in Sweden we have
brokers who market how to short FB big-time!

~~~
baq
with P/E at ~100 there's no way to be bullish if you've got anything
resembling a brain... yeah, i don't have amazon either.

~~~
harryh
Google went public in 2004 at ~200x earnings and is up 457% since then.

Apple went public in 1980 at ~100x earnings and is up over 15,000% since then.

I'm not saying that Facebook is Google or Apple, but there's a lot more to
analyzing a company than looking at P/E and calling it a day.

~~~
rieter
Google's revenue growth for the year prior to IPO (2003) was 234%. Facebook's
was 88%. Sorry, but Google was a massively better business.

~~~
zeroonetwothree
Doesn't that just support the point that looking at P/E alone is useless?

~~~
maigret
No, that supports the point that looking at P/E alone is not enough. Searching
for a spouse? Maybe you should not only look at her/his diplomas or music
tastes alone.

------
waterlesscloud
If Facebook was $14 a share, I'd sell everything else and buy nothing but FB.

~~~
MichaelApproved
If fb was down to 14, many things about the company fundamentals would be
different. There'd be a reason for it to have dropped by more than 50%.

Instea of going all in and buying the stock, consider options.

~~~
halter73
I think that the GP's statement was made ceteris paribus.

Naturally, if there was some new information available about the company
fundamentals that caused FB stock to drop to $14, it would only be a good buy
if you could determine that the market overreacted.

~~~
colkassad
I admit I needed to google your Latin. For anyone else, ceteris paribus: "all
other things being equal"

------
melvinmt
The author is assuming that stock performance is inherently linked to internal
company metrics, which is simply a naive assumption. P/E ratio is not the holy
grail of valuating companies, there are countless other stocks other than GOOG
who have been growing for years despite having a huge P/E ratio.

~~~
antr
for example?

------
16s
Maybe they should charge users fees to protect their privacy rather than focus
on charging advertisers? 10 dollars a year to not sell your data to
advertisers. 20 dollars a year to not allow law enforcement to view your data
without a court order signed by a judge, etc.

------
BenStroud
There have been so many articles speculating on the true value of Facebook
shares. The truth of the matter is that the market sets the value - and it's
just adjusting Facebook's, and other people's expectations at the moment.
$13.80 is pretty good value for a share - it gives plenty of space for bumps
upwards in the market (key sales, acquisitions and appointments).

The only way to go after an IPO like Facebook's is down. Look at the way the
UK market contracted after Lastminute.com's IPO. These are more mature digital
times, but there are still lessons to be taken from it.

------
duaneb
Of course, this is all based on current information of revenue... but people
don't pay for current business, they pay for potential of business (research),
and FB seems to have some decent research.

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freshfunk
Key fallacy in the argument: Revenue growth is compared to the average IPO.

If anything, Facebook is not the average company. It's not the average company
that's gone public either.

That's not to say they won't have challenges growing revenue. I think that a
company that's been around this long should've figured out how to mint money
by now. But I think this analysis is wrong.

------
smackfu
People have lost fortunes betting that things are under- or over-valued,
screaming all the way down that "I'm riggghhhhhtttt!"

------
AznHisoka
Because of the greater fool theory and the random walk theory I can not take
any analysis seriously.

------
sparknlaunch12
So if we apply industry standard valuation techniques, tested against an
existing listed tech company Facebook is valued at $13.80. Why did everyone
buy it at more than double the price? Ouch.

~~~
rjtavares
Basing a valuation on IPO statistics is not an industry standard valuation
technique. For an industry standard valuation technique, check Damodaran's
analysis made well before the IPO:
([http://www.aswathdamodaran.blogspot.pt/2012/02/ipo-of-
decade...](http://www.aswathdamodaran.blogspot.pt/2012/02/ipo-of-decade-my-
valuation-of-facebook.html))

His price was $28.

------
powertower
Remember, all Facebook has to do is figure out how to get each user to give it
$100/year.

------
biscuit
I was hoping $6.00

------
InclinedPlane
Now this is just silly. Stock prices are a bet. Sometimes they are more of a
sure bet, sometimes they are more of a risk. But the idea that anyone can know
exactly what a stock should be priced at for a company in a very dynamic field
like facebook is just silly. It's better to point out that facebook's current
valuation seems quite high and the risk of investing in facebook right now
also seems quite high. But beyond that there are no certainties. Facebook
could end up with a trillion dollars a year in net revenue in 10 years, or it
could go end up sold to a 3rd party company for a tiny fraction of it's
current market cap. We don't know and nobody can know.

~~~
bluedanieru
You really think companies investing billions in things like Facebook are just
throwing money at whatever they fancy and hoping it all works out? Investment
banks employ thousands of people who do nothing but sit in their office and
calculate if a certain security's price is off by fractions of a percent.
Virtually everything that bank does is based on that analysis. They are very
well-paid and a good market researcher is worth 100x his weight in gold-
pressed latinum. They do fuck up, often publicly as it turns out, but that
does not make their science any less refined.

~~~
borism
_but that does not make their science any less refined_

science? I wouldn't call it that...

~~~
gaius
Better hire some... Data Scientists!

------
its_so_on
Facebook was pushing really, really hard for a higher IPO. Why? Why would the
company WANT to sell off at 50, 100, or 150 price per earnings, higher and
higher? This is setting unrealistic expectations and setting themselves up for
failure. Does anyone know?

I have one theory: they need the money. Perhaps Facebook has some really
audacious plans that it is confident in, and simply needs that many bilion
dollars to do it (and even more).

From their execution on their audatious plans to date, this would be not be
out of character, nor would I completely lack faith in their ability to do so.
Any other ideas?

 _I mean, at the end of the day, wouldn't you rather have a billion in the
bank after IPO-ing at 25 price per earnings and ending up fizzling, than have
3 billion in the bank after pushing really, really hard to IPO at 75 price per
earnings and ending up fizzling? Personally, 1 billion is the same as 3
billion to me, but the latter scenario is not very pleasant, including plenty
of possible lawsuits, etc. It's a lot easier to fault and deride a company in
the latter scenario if it doesn't quite live up to expectations.._.

~~~
Loic
An IPO is firstly here to make money for the company. FB masterly made the
maximum money they could, they sold as high as possible. It was a perfect IPO
for FB. Nothing more.

~~~
its_so_on
I don't know. I'm pretty sure they wouldn't have wanted to raise $100billion.
What would they do with it except buy back stock after a crash? Apple can't
think of any use for _their_ $100b in cash, and they're a hardware company
with sprawling operations on three continent, and a capital-intensive retail
division on four! (They're doing buybacks and dividends with their cash.)

By contrast, the amount FB actually raised, which is considerably less than
that, they're acting like they need or have good use for.

 _This is just a theory, of course, and perhaps you are right that Facebook
would have been HAPPY to raise a hundred billion dollars it has no use for.
(Perhaps as part of stock dumping by big shareholders, who don't care what
happens after this.) The above is just a guess. But I want to repeat my reason
for it, which is that I have been extremely impressed by the expansiveness of
Facebook's vision to date, and its execution on it. If they do have something
big in mind, it's not unprecedented for them to be able to execute on it; I
have some faith in their ability to do so, versus lots of other companies that
suddenly realize they can think a lot bigger now that they have all this cash,
but have no record of doing so. We'll find out if there's anything like this
that Facebook has in mind soon enough..._

------
Estragon
I think this analysis ignores the marketing potential of facebook's user data.
No one has even scratched the surface of targeted marketing with such data. An
obvious thing to try would be to tailor the presenter of a product based on
the personalities the user seems to defer to in facebook conversations. But I
haven't bought any FB stock, I just think the analysis is facile and the real
picture is much murkier.

~~~
silvestrov
Odd that a lot of people think that "No one has even scratched the surface of
targeted marketing" for years and years on while no great improvements are
made.

It looks more and more like natural intelligence in the 80's. Promised to be
just around the corner, but never came.

~~~
Estragon
No one has scratched the surface of what could be done with data like
facebook's. The example I gave in the grandparent is something that just
couldn't be tried in a meaningful way before.

------
rayiner
I don't get the negativity towards FB that seems to be an undercurrent in
these threads. This is Hacker News. If FB IPO'ed too high, that's good for the
hackers. That means they got more money to build the business. If some
investors lose a lot of money in the process, who cares?

~~~
nemesisj
Yes, because evil investors are not real people like us techies!

~~~
rayiner
No, but investors have their own sites, their interests are not completely or
even mostly aligned with those of techies, and it's silly for tech-focused
sites to be preoccupied with their well being in a transaction that benefited
a tech company at the expense of a bunch of institutional investors.

