What's A Fair Value for Facebook Stock? (opens in new tab)

I'm not rushing out to buy Facebook, but the arrogance and condescension of this article is overwhelming:

> valuing Microsoft (MSFT) when they went to IPO was tricky - back then what was going to happen was hard to predict. Valuing Google was a lot easier, and valuing Facebook is a cinch.

Right, it's just a cinch. The ineffectual ads Facebook has been toying with are the only endgame. There's no possibility they could you know, improve the ads, or completely overhaul them, or make money from other channels. I mean the guys who built the biggest, stickiest social network in the world that destroyed all the myriads before them could never possibly come up with a fresh idea for how to make money.

Instead let's just do a traditional market analysis so that we can feel very smug and turn the snark up to max.

I admit I don't fully understand financial analysis, so I don't understand how he got to $10. However I do know math and I figure I could do a reasonable comparison of stock prices. What I wanted was an apples to apples comparison between FB and GOOG. To do this I figured out what FB's price should be if it were valued like GOOG.

What I needed to know were the number of shares outstanding, the current stock price, and their revenues. A simple lookup gives me the first two items, and I have the last one from the article itself.

To get the values in terms of revenues, I multiplied the number of stock outstanding with the stock price, and then divided by the revenue. This gets me the stock to revenue ratio of GOOG.

    Shares * Price
    -------------- = Stock to Revenue ratio
       Revenue

GOOG's equation looks something like this: 326M * 613 / 36.5B ~= 5.475 S:R

Knowing this, I can now start calulating FB's ratio and solve for it's stock price.

2140M * FBStockPrice / 3.71B = 0.576 * FBStockPrice

Solving for FBStockPrice...

0.576 * FBStockPrice = 5.475, FBStockPrice = 9.4917

Refs:

[GOOG]: https://www.google.com/finance?client=ob&q=NASDAQ:GOOG

[FB]: https://www.google.com/finance?client=ob&q=NASDAQ:FB

TL;DR: This doesn't mean anything. I just like math.

Wow. That's a lot of words for what's essentially just a back-of-the-envelope estimate.

Besides, claiming that the fair value is $10 but you should only buy at $5 is really odd. You must be extremely risk averse to require a 100%/year return. And that's after he discounted 30% relative to Google. Also, if predicting Facebook's financials is easier than it was to predict early Microsoft's, why should anyone expect returns as large as early Microsoft investors?

I suggest the saner, and much more concise estimate by NYU's Prof. Aswath Damodaran:

http://www.businessinsider.com/valuation-guru-facebook-is-wo...

I think about it this simplistic way: If Microsoft and Google had the opportunity to acquire Facebook for $40bn, would they pass on it and risk the other getting it? Hell no.

So I'd say it's worth at least around $18.

tl;dr: $10. His advice: don't pay more than $5.