Facebook Valuation: UPDATED…

This comparables valuation of Facebook is still being improved. Yesterday I decided to add LinkedIn as a comparable based on their success as an online social & professional giant. While they are less advertising focused and more fee based, the company has similar prospects for growth as Facebook, as like Facebook, it is an online leader of its industry. Please see updated Valuation Model below:

Based off of this model, I now have a price target for Facebook shares of $25.96

Multiples Valuation for Facebook

I personally have been quite bullish on Facebook (NASDAQ: FB) since it went below $20 earlier this year. The simple fact that the company has over 1 billion users was enough to get me excited. Given this kind of user base, all the company needs to do is figure how to best monetize these users. While Facebook could always just go ahead and charge its users a minimal fee of $5 a year, it seems that for now they have chosen against this route. The company is now building strategic relationships with companies of all types and offering targeted marketing and advertising services. Since Facebook has all sorts of data on its users, this will likely be a very effective effort.

Considering how many pundits have come out with sell ratings on Facebook, I decided to conduct my own analysis utilizing a mulitples valuation approach to attempt to value the firm and its stock price. To do this, I used 3 measures that I felt would be the most accurate method to value the firm: Price to Sales, Price to Cash and Price to Book. I used the mulitples of the five most similar public companies I could think of and then I weighted them according to which company is most similar to Facebook’s business model. See diagram below:

FB Valuation
Comparables Google (.5) Amazon (.1) Zynga (.2) Groupon (.1) Pandora (.1) Weighted Aggregate
P/S 4.51 1.76 1.31 0.82 3.65 3.14
P/C 3.15 13.37 0.9 2.28 13.29 4.649
P/B 4.69 19.24 1.27 1.49 15 6.172

I feel that Google has the most similar business model, utilizing targeted advertising with Zynga coming in second place. Zynga offers online games and makes money from advertising as well. I consider Facebook to be a type of online social game. The others were just weighted at 10% each and include other online business, both retail and social.

Using the weighted aggregates, I then multiplied these values by Facebook’s actual Sales, Book per Share and Cash per share to get the following implied stock prices:

FB VALUES Implied Stock Price
sales 4.64  $                                      14.57
book/share 6.54  $                                      30.40
cash/share 4.82  $                                      29.75
 $                                      24.91

After averaging these values, I obtained an implied stock value of $24.91/share for Facebook. This is substantially higher then the $21.30 that Facebook is currently traded at.

Since the company’s lock up has now expired, many insiders that have previously been unable to sell can now sell their shares. However, considering the stock is up today on large volume, it appears that either the insiders are not selling, or that institutional investors are buying up all shares that are being sold by insiders. Either way, I take this as a strong bullish signal that Facebook might have put its bottom in and has large room to run to the upside.

Current Price Target: $24.91

Is Groupon Stock a Buy?

Due to long term competitive advantage threats, Groupon (NASDAQ: GRPN) may not be the best oppurtunity in terms of long term investment options. Both Amazon (NASDAQ: AMZN) & Google (NASDAQ: GOOG) have made recent attempts to try to capture a bit of the daily deal market. However, at this point in time, they have both failed to take any substantial stake in this market. Despite being down 64% year to date, Groupon seems to be of fairily reasonable value now, meanwhile the company continues to strengthen its hold on its market and expand its geographic reach.

Current market conditions show a battle between bulls and bears. The companies that have the resources to compete in this market are generally the blue chips which are able to utilize their vast resources to continue to grow. These companies are also able to increase investor confidence using tools such as share buy backs and increasing dividends. Another type of company that should be able to thrive in current market conditions is one designed to save consumers money. Consumers are desperatly trying to cut down on their costs, fortunately Groupon offers an excellent service that can both help a struggling small business and offer discounts to consumers. Both of these services seem very applicable considering the current state of business.

Groupon has the business structure and mobility infratructure in place to target the masses and thrive during a stalling economy. It could actually be argued that this is one company that would do better during a slowing economy as opposed to a thriving one in which people are less price conscious. FINVIZ qoutes Groupon’s Forward P/E as 11.45 based off of the company’s guidance. This is a great value for a young company that has the potential to grow many times its current size. FINVIZ also quotes that insider buying has increased by 10% in the last  months, this shows confidence from within the company. Groupon seems like an excellent buying opportunity as long as one keeps an eye on the competition. I expect Google and/or Amazon to eventually gain ground, but at this time Groupon is leaps and bounds ahead in this particular market.

I have recently moved to Vancouver, BC, and have been impressed with their exposure and use in this urban mega center. I expect the company’s international exposure to continue to grow. The ease in use of their mobile platform allows them to target a young and adapting population. While I have not purchased a Groupon yet, I was surprised at how many offers were available just in my neighborhood after doing some research last night. This puts Groupon in a “Win-Win” category for me, as I not only have made an investment in the company but I will also plan on using its services.