What's A Fair Value for Facebook Stock?

I'm not rushing out to buy Facebook, but the arrogance and condescension of this article is overwhelming:<p>&#62; <i>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.</i><p>Right, it's just a <i>cinch</i>. The ineffectual ads Facebook has been toying with are the only endgame. There's no possibility they could you know, <i>improve</i> 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.<p>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.<p>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.<p>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.<p><pre><code> Shares * Price -------------- = Stock to Revenue ratio Revenue </code></pre> GOOG's equation looks something like this: 326M * 613 / 36.5B ~= 5.475 S:R<p>Knowing this, I can now start calulating FB's ratio and solve for it's stock price.<p>2140M * FBStockPrice / 3.71B = 0.576 * FBStockPrice<p>Solving for FBStockPrice...<p>0.576 * FBStockPrice = 5.475, FBStockPrice = 9.4917<p>Refs:<p>[GOOG]: <a href="https://www.google.com/finance?client=ob&#38;q=NASDAQ:GOOG" rel="nofollow">https://www.google.com/finance?client=ob&#38;q=NASDAQ:GOOG</a><p>[FB]: <a href="https://www.google.com/finance?client=ob&#38;q=NASDAQ:FB" rel="nofollow">https://www.google.com/finance?client=ob&#38;q=NASDAQ:FB</a><p><i>TL;DR</i>: 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.<p>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?<p>I suggest the saner, and much more concise estimate by NYU's Prof. Aswath Damodaran:<p><a href="http://www.businessinsider.com/valuation-guru-facebook-is-worth-29-2012-5" rel="nofollow">http://www.businessinsider.com/valuation-guru-facebook-is-wo...</a>

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

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