Facebook Inc (FB) Valuation ‘Very High’, Depends On Sustained Growth


Facebook Inc (NASDAQ:FB) shares are down 2% this morning after a rough couple of days last week. Investors initially responded to the company’s earnings beat very positively, but management’s cautious statements regarding falling use among younger teenagers and the number of ads in news feeds gave investors pause.Facebook Inc (FB) Valuation 'Very High', Depends On Sustained Growth

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Indigo analysts see the social network’s valuation as being very high and see downside risk to its stock because of the high valuation. They provided their own analysis of Facebook’s financial situation.

Facebook returns “stunning” results

Analyst N. Landell-Mills notes along with others that Facebook Inc (NASDAQ:FB) posted very strong results for the September quarter. The company’s revenue growth accelerated slightly to 60%, a very high rate. EBIT margin rose to 36.5%, while earnings per share climbed 82%. GAAP earnings per share increased by 19 cents, going up to 17 cents. User growth remained strong at 25%, and revenue growth was driven mostly by a 33% increase in average revenue per user, which stemmed from ad prices which increased 42%.

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Landell-Mills notes that this is “impressive” since Facebook’s revenues are quickly shifting from desktop to mobile.

Facebook’s good performance tempered by “developments”

The analyst notes that although Facebook Inc (NASDAQ:FB) did perform very well during the September quarter, its outlook “was clouded by developments.” There were three main developments which he points to as being significant for the social network.

The company does face a limit in increasing the number of ads show in news feeds any further. He says although this is important, it isn’t critical because ad prices increase when the number of them is limited. Management already indicated that younger teens in the U.S. are spending a bit less time on the site, and the Indigo analyst suggests that although this isn’t critical yet, it could become critical.

The social network also delayed the roll-out of video ads until 2014.

Placing restrictions on Facebook’s valuation

He said these developments are restricting Facebook Inc (NASDAQ:FB)’s fundamental valuation to $45 per share at this point. He notes that the social network’s outlook is still for greater than 40% growth and that the company “retains enormous potential.” But for right now, he sees it just as potential.

The analyst says Facebook’s valuation is extremely high and depends on the company sustaining strong revenue growth of more than 40%. This amount is far above the average industry growth of between 15% and 20%, which implies that the company has to take market share. In addition, he notes that subscriber growth is expected to slow down, so the focus remains on increasing average revenue per user, like through better ad targeting.

He said if Facebook Inc (NASDAQ:FB) is going to keep maintaining its high growth, it will have to raise ad returns and prices, expand new revenue streams and introduce new services to boost user engagement.

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
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