The financial markets are famous for getting caught up in narratives. It’s what happens when things go wrong. Every bubble is based on people repeating the same stories again and again without considering the changing facts. Nowhere is this more true than in the financial press.
One of the most enduring stories in the last couple of weeks has been Facebook Inc (NASDAQ:FB) and its doomed IPO. Maybe it is time for a reexamination before we get carried away. One analysis firm certainly thinks so.
In a new report from Wedbush Equity Research the firm maintains its price target of $44 on Facebook. The report deems that none of the fundamentals that led to the opriginal price target on the company have changed. The only thing contributing to the low price on the shares right now is a depression brought on by huge issues during the IPO process.
The report gives a general roundup of those problems, the Nasdaq software issues, the lawsuits, the increase in the number of shares sold, the shorting of the shares by many investors. There is still an outperform rating on the stock at Wedbush and the $22 price target is a 22X E2015.
The general vein of the argument in support of Facebook and huge revenue growth in the near future is as follows. The company will continue to provide a better experience, that will lead to more engagement and the greater engagement will lead to more time being spent on the site. That represents an irresistible opportunity for Facebook according to Wedbush.
The research firm sees that strategy leading to revenue of $14.5 billion in 2015. Revenue in 2011 were $3.7 billion. Profit in 2015 is projected to be $7.5 billion. Wedbush is as optimistic now as they were in the days before Facebook got itself into trouble.
How does this analysis stack up to the huge problems the firm faces? It doesn’t look spectacular. The idea that Facebook will be able to continue to design itself into more engagement is a difficult one to support. The latest full redesign, Facebook Timeline, is still the subject of many user’s ire.
After that the whole line of reasoning falls down. More time spent on the site, as GM mentioned and Wedbush references, does not necessarily mean more ad engagement.
Wedbush is right in many respects however. Facebook’s ongoing value should not be determined by a disastrous IPO but by its present and future performance. Right now neither of those look good.
However, one has to assume huge revenue growth and pay a premium of a 22X multiple to get a return. Value investors would be wise to proceed with caution.