Just before Facebook went public, valuation guru Aswath Damodaran said the stock would see a “Goldilocks IPO” – not too hot, not too cold. And he was right.Shortly after, Damodaran argued that Facebook’s fair value was around $29.
Based on his up-to-date valuation analysis, he sees Facebook’s intrinsic value at $23.94.
Here is what has changed since his more bullish valuation in May:
The biggest piece of financial information that has emerged on Facebook has been one quarterly earnings report a few weeks ago and it seems to me that not much has changed on either side of the ledger since February. The earnings report was a disappointment to markets, revealing less revenue growth than anticipated and an operating loss, largely as a result of share compensation expenses that were recognised when restricted stock units owned by employees were recognised at the time of the IPO. Facebook remains a company with vast potential (their user base has not shrunk), no clear business plan (is it going to be advertising, product sales or something else) and poor corporate governance. I had not expected any of these issues to be resolved in the one quarterly report and they were not. I did make some adjustments to my valuation: (a) lowering my revenue growth (with my 2022 revenue estimates dropping by about 10%, relative to my May estimates, (b) reducing the operating margin from 35% to 32% to reflect the higher expenses and (c) reducing my sales to capital ratio from 1.50 to 1.20 to incorporate the higher cost of acquisition driven growth.
Now, that the stock is below $20, is he a buyer?
Not necessarily. His response is a bit ambiguous.
“My conclusion is that Facebook is not quite at the threshold of being a buy yet, but it is getting close,” he writes in his Musings on Markets blog. “I have a limit buy order for the stock at a price of $18.“
So it sounds like $18 is when Damodaran pulls the trigger.
“Based on my assumptions, there is an 80% chance that the stock is under valued at $19 a share and an almost 85% chance that it is under valued at $18 a share,” he writes.
Read more at AswathDamodaran.blogspot.com.
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