We heard yesterday that the first sell-side report came out on Facebook. This is unusual as most firms do not issue reports before the IPO. Unsurprisingly, the report, which came from Wedbush Research, had a buy on the stock.
Reports on the company’s IPO have also come from Sterne Agee, Evercore Partners and Susquehanna Financial Group.
Most value investors have shied away from Facebook. Warren Buffett stated that he would not buy it. Mark Zuckerberg has 57% control of the company so shareholders better hope that he can manage the $100 billion company well. Other shareholders will have practically no say .
What was shocking was the price target of $44 given by wedbush. This would give Facebook a valuation of $150 billion? Numbers do not matter anyway as mentioned below.
Although some of the other firms gave an even higher valuation before this went to print!
Facebook now ‘only’ has a PE of 80, but the company will grow forever right?
Web thinks the company is a bargain, since they estimate that at $44 a share, the company will have a PE of ‘only’ 22 in 2015 (if everything goes right)? Seems very reasonable doesn’t it?
Also the firm thinks that current users of 900 million will increase to 2.5 billion in five years, meaning that 43% of the planet will use Facebook (excluding China where it is banned). Wedbush also thinks eventually 60% of the planet will be using Facebook.
Additionally the firm is not too concerned about lawsuits from Yahoo, FTC privacy issues, increasing competition, Zuckerberg’s control, or the fickle nature of the social networking market which has seen many supposed giants fall in the last decade.
The company is currently involved in a legal battle with search giant Yahoo! Inc. (NASDAQ:YHOO) over intellectual property. Though the initial suit by Yahoo was deemed frivolous by many the Facebook legal team is still dealing with the issue and such battles can be expected to continue into the future.
Zynga Inc. (NASDAQ:ZNGA) accounted for approximately 12% of Facebook’s revenue in 2011 according to Facebook’s filings. The firm uses a combination of direct advertising purchases and payments processing fees to generate revenue and Facebook takes 30% of that in exchange for providing the platform. That number should be worrying to any who see Facebook’s success in advertising as all but complete.
The 12-month price target of $44 reflects 22x of a 2015 EPS estimate of $2.00. When Google Inc. (NASDAQ:GOOG) had its IPO in 2004 the company opened at $84 dollars per share. It’s Price to Earnings ratio then was at 80 the same as the Facebook’s is estimated to be at its IPO.
Also just incase the 22 PE in three years estimated earnings is too high for some, have no fear because the firm does not think this is a concern. Like 1999, valuations do not matter anymore, its a new era and of course ‘this time is different.’
As the firm even states:
‘In our view, Facebook cannot be valued by simply placing a multiple on its current revenues, operating profit, EBITDA or EPS. Rather, we think that any valuation should consider the potential revenues of the company, the level at which the company will likely break even, and the margin on revenues above that breakeven level.’
So if none of these issues concern you, and valuation is cheap or doesn’t make a difference, and you want to buy Facebook because its cool, then it surely is a great investment.
Disclosure: No position and as always this is NOT investment advice.