When Sanford Bernstein Talks People Listen
Wall Street investment firm Sanford C. Bernstein has delivered a new blow to Facebook this morning: A $25 price target.
Facebook shares, two weeks into their life as the most heavily-traded IPO of all time, face a “material risk” because investors will question the company’s ability to meet 2013 forecasts, Bernstein says.
Bernstein adds to its underweight rating.
“Therefore, it is difficult to argue for owning the stock today.”
The price target is the lowest target on the street, according to FactSet Research. There are 15 ratings, of which seven are the equivalent of buy, four are a hold and four are a sell, according to the data provider.
Bernstein says it based its opinion on Facebook's ad revenue forecasts. It has doubts that “social advertising” will prove to be disruptive enough to beat back rival Google. The firm says Facebook’s ad-revenue growth has seen a “rapid deceleration” over the recent quarters but while that will ease off it will lag Google’s growth rates.
Bernstein does say it is possible the social advertising will outperform Google, but that over the next 12 months too many questions won’t be answered, so Bernstein is avoiding the stock for now.
Facebook shares opened down 2.8% to $26.94 Monday.
MarketWatch's Mark Hulbert Values Facebook And You Won't Like What He Says
Well, then, what should be the price of Facebook’s stock?
Rather than endlessly rehashing the events that have taken place over the last week, it is this question that investors should be asking. Surprisingly, however, few are doing so.
And yet, courtesy of a just-released study, calculating a fair price for Facebook’s stock isn’t as difficult as it might otherwise seem.
A study titled “Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996–2010.” by Jay Ritter, a finance professor at the University of Florida, and two researchers at the University of California, Davis: Martin Kenney, a professor in the Department of Human and Community Development, and Donald Patton, a research associate in that same department provides interesting insights into how to value IPO's like Facebook.
Price-To-Sales Ratio
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 Facebook’s revenue grows just as fast, and given that the company’s latest-year revenue was $3.71 billion, its annual revenue in five years’ time will be $11.58 billion.
Assuming that the total number of its shares stays constant, that works out to a price per share of just $23.26 — in contrast to its recent closing price of $33.03.
Ouch.
Five-Year Average Return of 11% Annualized
Actually, however, the news is even worse: No one is going to invest in Facebook shares today if its price will be 30% lower in five years. So, in order to entice someone to invest in it today, Facebook needs to offer a handsome return. 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.
Double ouch.
P/E Ratio Like Google Based On A Five Year Average Return of 11% Annualized
Don’t like that answer? Try focusing on earnings rather than sales, and you get only a marginally different result. Assuming its profit margin stays constant (instead of falling as it could very well do as it grows), assuming its P/E ratio in five years will be just as high as Google’s is today, and assuming that its stock will produce a five-year return of 11% annualized, Facebook’s stock today should be just $16.66.
How can Facebook investors wriggle out from underneath the awful picture these calculations paint? By assuming that its revenue and profitability will grow faster than the average IPO between 1996 and 2010 — and not just by a little bit, either, but a whole lot faster.
Of course, it’s always possible that Facebook will be able to pull that off.
But, as Professor Ritter pointed out to me earlier this week, “the bigger a company gets, the harder it is to maintain percentage growth.” And Facebook is already huge — larger, in fact, than all but 47 other publicly traded companies in the U.S.
So my back-of-the-envelope calculations for this column could very well be too optimistic rather than too pessimistic.
Given all this, Ritter said that a market cap “of $63 billion … five years from now seems like a very reasonable scenario.”
COMMENTARY: In a blog post dated May 30, 2012, Thomson Reuters analyst Jharonne Martis valued Facebook stock at only $9.59 based on its intrinsic value. If you follow her logic it parallels very closely with Mark Hulbert's Facebook valuation (see above) that used a five-year average return of 11% annualized resulting in a share price of $13.80. Jharonne's valuation "squeezes out" investor hype and future expectations from the valuation process, which to my way of thinking is the main reason why Facebook's share price have dropped by over 30% since the IPO date. I calculated the market value-to-intrinsic value ratio of Facebook stock, and it was nearly 4-to-1. Google and Apple both had MV-to-IV ratios of under 1. In short, Facebook stock is over-hyped and over-valued. As of 2:11 p.m. EST, Facebook shares were trading at $26.58--down nearly a point, and continue dropping.
DISCLAIMER: I swear by God allmighty that I do not own Facebook stock nor ever will, but should you be interested in fucking up your 401(K), please click HERE for lots of information about social media, Facebook, Zuck and a special on paper shredders.
Courtesy of an article dated June 4, 2012 appearing in The Wall Street Journal and an article dated May 25, 2012 appearing in The Burning Platform
Hi Tommy, well Facebook is a new player in the stock market so i expect it is normal to have that low shares.
Posted by: information arbitrage | 10/19/2012 at 10:25 PM