Latepost Facebook Confront Plant: Fourth Dimension To Friend The Company?

Facebook article/SB10000872396390443324404577593121764584372.html" target="_blank">returned to the headlines on Friday, later it's stock toll dropped below $20. At it's closing pricing of $19 on August 17, Facebook was trading at roughly one-half it's IPO offering price. Investors, analysts together with journalists are all looking for the ground for the collapse together with some at to the lowest degree seem to direct hold establish a set target: the toll drop, they argue, is the number of the "unlocking" of restrictions on insiders selling shares. The work amongst this explanation is that it has never been a cloak-and-dagger that insiders inwards Facebook would last able to sell shares starting August xvi together with I would wager that no i would direct hold fifty-fifty noticed the destination of the lockup period, if the IPO had gone good together with the stock were trading at $ 55/share. So, what is going on amongst Facebook? Why has its stock toll plunged over the terminal few weeks? And is the stock inexpensive at $19?

The even out together with hence far...

As nosotros expression dorsum at 2012, it is quite clear that Facebook has held us inwards its thrall (and non ever inwards a proficient way) through much of the yr together with my posts over the yr on the companionship reverberate that fascination. Rather than comprehend upward my newspaper trail, allow me depict attending to it (warts together with all):

1. S1 Filing (February 2012): In my starting fourth dimension postal service on Facebook this year, right later Facebook filed its financials (S1) amongst the SEC, I valued Facebook at $28/share (or $70 billion). I based this valuation on the company's immense potential (its vast user base of operations together with the data it had most these users), but was concerned most the absence of a clear concern conception (to convert users to revenues), the overhang from insiders stockholdings/options (yes, y'all could see the lock upward catamenia ending inwards February) together with the abysmal corporate governance. 
2. Playing the IPO popular game (February 2012): In answer to a moving ridge of articles that seemed to propose that investing inwards the Facebook IPO (at the offering price) would last a certain route to profit, I tried to supply some history on the IPO game inwards my second postal service on Facebook, noting that piece it was was truthful that investing inwards the average IPO does generate a popular for investors, this popular is non guaranteed together with that the IPO game tin last a loser's game. 
3. The hateful solar daytime earlier the IPO (May 2012): On the hateful solar daytime earlier the IPO, I posted on what I saw equally the hubris of those involved inwards the IPO procedure - the investment bankers, the companionship (Facebook) itself together with the institutional investors, who all seemed to mean value that they could Pb the marketplace past times to wherever they wanted to go. I updated my valuation of Facebook to most $27 a part together with contended that the stock would opened upward amongst a relatively minor popular (that the bankers would acquire the pricing right) but that the stock was overvalued for longer term investors.
4. The post-IPO assessment (May 2012): The stock opened (late because of the NASDAQ technical problems) at most $42 together with really speedily lost solid soil over the hateful solar daytime to destination the hateful solar daytime at below the offering price.  I posted my rationale for the momentum shift together with argued that a cracking bargain of the blame could last set at the feet of the companionship together with its bankers, who essentially took momentum for granted. I also ended the postal service past times controversy that the switch inwards momentum could really good Pb direct hold the stock inwards the other direction, from over valued to nether valued.

An updated valuation

If Facebook was over valued at $38, relative to the estimated value of $27/share, is it nether valued at $19? To address this question, I revisited my Facebook valuation from May together with looked at what I direct hold learned most the companionship (for the amend or worse) since. Has in that location been plenty data that has come upward out most the theatre that could direct hold caused the intrinsic value (at to the lowest degree equally I stair out it) to driblet below $19? The biggest slice of fiscal data that has emerged on Facebook has been i quarterly earnings written report a few weeks agone together with it seems to me that non much has changed on either side of the ledger since February. The earnings written report was a disappointment to markets, revealing less revenue increment than anticipated together with an operating loss, largely equally a number of part compensation expenses that were recognized when restricted stock units owned past times employees were recognized at the fourth dimension of the IPO. Facebook remains a companionship amongst vast potential (their user base of operations has non shrunk), no clear concern conception (is it going to last advertising, production sales or something else) together with misfortunate corporate governance. I had non expected whatever of these issues to last resolved inwards the i quarterly written report together with they were not. I did brand some adjustments to my valuation: (a) lowering my revenue increment (with my 2022 revenue estimates dropping past times most 10%, relative to my May estimates, (b) reducing the operating margin from 35% to 32% to reverberate the higher expenses together with (c) reducing my sales to upper-case alphabetic quality ratio from 1.50 to 1.20 to comprise the higher cost of acquisition driven growth. With these changes,  my intrinsic value for Facebook amongst the updated data is $23.94, a driblet of only over 10% from my May 2012 estimate.

So, why did the toll driblet together with hence much? There are several possible reasons. The starting fourth dimension is that my gauge of intrinsic value is completely wrong, that the truthful value for the companionship has ever been inwards the depression teens together with that the marketplace is correcting its initial mistake. The 2nd is that most investors inwards Facebook don't know what the value of the companionship is together with don't help a hoot most it. Instead, they are pricing (rather than valuing) the stock, reacting to the "surprise" inwards each tidings even out together with to how other investors inwards the marketplace are responding to that story. This, later all, is the nature of momentum investing, amongst positive surprises getting magnified past times the crowd into unrealistic toll jumps together with the negative surprises into catastrophic drops. I know that analysts direct hold turned bearish on the stock but since many of these analysts assured me that Facebook was a pocket at $38/share, I am non inclined to lay much weight on their prognostications. In fact, they really fact that they are turning against the stock may last a positive indicator.

Time to buy?

Now that the stock is at $19, most $5 below my gauge of intrinsic value, would I buy? To brand that judgment, I considered 3 factors.

1. My value could last over stated: I empathise that this is a risky investment together with that my gauge of value could last hopelessly wrong. In fact, I followed upward my intrinsic valuation amongst a simulation, where I looked at the distribution of intrinsic value, allowing revenue growth, margins together with cost of upper-case alphabetic quality to vary. 

Based on my assumptions, in that location is an 80% direct a opportunity that the stock is nether valued at $19 a part together with an almost 85% direct a opportunity that it is nether valued at $18 a share.

2. Management is non going to change: The corporate governance number is the i that I direct hold the most problem overcoming. The construction of the voting rights inwards the companionship ensure that in that location is piffling that stockholders tin practise to influence how this companionship is run together with that tin last a potential work if it locks itself into a self-destructive path. Calling for Mark Zuckerberg to footstep downwardly or part power, articles.latimes.com/2012/aug/17/business/la-fi-zuckerberg-future-20120817">as an article inwards the Los Angeles times did, are completely unrealistic. The Russians direct hold a amend shot at getting rid of Vlad Putin than Facebook stockholders direct hold of displacing Zuckerberg. For some, this may last a bargain breaker, together with it came about beingness i for me.

3. Vindication, fifty-fifty if I am right, volition non come upward quickly: Markets know no fury to agree that of momentum investors scorned, together with these investors tend to plow amongst a vengeance on the companies that disappoint them. Put inwards stark terms, it is solely possible that my valuation of Facebook could last right but that the stock toll could buy the farm along to maintain dropping equally investors bail out. Eventually, the "intrinsic" truths volition emerge, but it may last a long fourth dimension coming. 

My decision is that Facebook is non quite at the threshold of beingness a purchase yet, but it is getting close. I direct hold a boundary purchase society for the stock at a toll of $18. I would last interested inwards seeing where y'all stand upward on the stock together with y'all are welcome to encounter your gauge of intrinsic value for the stock together with your threshold for buying the stock inwards the shared Google spreadsheet.

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