Latepost Marketplace Mood Swings: Facebook Euphoria

Facebook's stock cost first endeavour at valuing Facebook was inwards Feb 2012, when I attached a value of $68 billion to its equity, alongside extremely generous assumptions on revenue increment together with margins. In estimating this value, I assumed that Facebook would choose a revenue increment path really similar to Google's, spell sustaining operating margins similar Apple. 

As the initial world offering drew nearer, I grew increasingly wary virtually the offering for 2 reasons. The root was the feel that many investors, peculiarly institutional, seemed to mean value that the Facebook IPO was an absolute no-lose proposition, no thing what the offering cost was, since momentum would comport the stock higher. In this post, from Feb 2012, I cautioned investors from buying into this proposition. The 2nd was that the fellowship together with its bankers seemed to assume that they could laid the terms for the offering together with that the marketplace could locomote along. In my experience, those who believe that they choose ability over markets realize otherwise, sooner rather than later.

The IPO

On May 17, 2012, simply after the atomic number 82 investment banks laid the offering cost at $38/share together with the 24-hour interval before the offering date, I did my terminal pre-IPO valuation together with estimated a value per percentage of virtually $25/share. While you lot tin give notice get the excel spreadsheet containing the valuation inwards this post, I mean value this moving painting ameliorate illustrates the assumptions together with linkages that went into my gauge of value:

The actual offering appointment is straight off part of marketplace lore, from the technical problems that NASDAQ had inwards getting the trading started to the substantial back upwards that the investment banks had to offering to maintain the cost from collapsing. After an initial spurt inwards the cost to $42, the stock ended the 24-hour interval at $38.23 a share.

Once the cost back upwards faded, the stock cost retreated inwards the weeks after the IPO to drib below $30 inwards June 2012. In a ship after the IPO, I argued that the marketplace reaction to the IPO was simply desserts for the arrogance together with hubris of both investment bankers together with the fellowship inwards the atomic number 82 upwards to the IPO. 

The Early Returns

In the months after the IPO, Facebook faced a mount of troubles, some of its ain doing together with some reflecting the costs of going public. The IPO failure colored investors' views of the fellowship together with its management, leading them to pose the worst possible spin on every activeness together with occurrence at the company. At the same time, the IPO also exposed the fellowship to meaning costs, peculiarly every bit the costs of stock-based compensation were recognized, leading to a drib inwards operating income.  The nadir for the stock was the quarterly earnings written report virtually a twelvemonth ago, when the fellowship reported sagging revenue increment together with much lower margins. The momentum game turned fully against the company, alongside many of the analysts together with institutional investors who had been cheerleaders inwards the pre-IPO days contestation that the stock was a "sell".

On August 20, 2012, Facebook had dropped below $20/share together with I made an declaration that the marketplace had over reacted to intelligence together with that the earnings reports were non every bit catastrophic every bit they were perceived to be. I also argued that investors were beingness distracted past times side stories virtually expiring lock ups together with mobile mashups. In fact, my estimate of value inwards August 2012 was $23.94, simply a pair of dollars below my gauge on the 24-hour interval before the IPO. At the halt of the post, I noted that I had a bound purchase gild at $18/share on the stock together with that however my concerns virtually corporate governance inwards the fellowship together with the close term effects of momentum, it looked similar a decent buy. 

Now, a confession. I had never, ever bought a stock on the appointment that it hitting its absolute low, until my bound gild for Facebook got fulfilled at the start of trading on September 4, 2012. The stock hit its depression of $17.58 that day and, fifty-fifty alongside setbacks along the way, it has non looked dorsum since. I would honey to claim timing precision but it was absolute luck, together with I would rather hold upwards lucky than good.

Learning from Earnings: Updating the Facebook valuation

If the root 2 earnings reports were viewed every bit negative surprises, they did convey expectations downwardly for the fellowship together with the fellowship has delivered positive earnings reports inwards its in conclusion 3 earnings reports. While it is slow to acquire lost inwards the minutia of these reports, hither are the intelligence stories that I come across embedded across the earnings reports:

1. Revenue increment continues to hold upwards strong: Revenues at the fellowship over the root 2 quarters of the electrical flow financial twelvemonth choose been virtually 46% higher than revenues inwards the root 2 quarters of the in conclusion financial year, simply inwards a higher house the expected increment charge per unit of measurement of 40% used inwards the IPO valuation.
2. Operating margins stay high: Operating margins declined in conclusion year, primarily because of the expensing of stock-based compensation from pre-IPO days. That charge has been lifted inwards this financial twelvemonth together with the operating margin over the in conclusion 4 quarters is virtually 30%, if R&D is expensed, together with closer to 40%, if it is capitalized.
3. Facebook remains for the most part an "advertising" company: While Facebook has made attempts to broaden its revenue base of operations together with production mix, it remains subject upon advertising for 84% of its revenues inwards the in conclusion 4 quarters, non significantly unlike from pre-IPO days.
4. Facebook seems to choose broken the "mobile media" code: It is truthful that the in conclusion few earnings reports choose included skilful intelligence on the mobile media front, alongside Facebook showing the capacity to deliver, but am afraid that I don't percentage the euphoria alongside which some investors choose greeted this news. Don't acquire me wrong! Being successful inwards mobile media is critical to Facebook's success but the revenues that I (and others) choose projected for Facebook in conclusion twelvemonth assume that success. So, the skilful intelligence inwards the mobile media marketplace keeps them on the forecasted revenue path, but failure would choose been devastating. 
5. Management has matured: If at that topographic point is skilful intelligence that came out of the botched IPO, it is that the managers at Facebook (from the transcend down) seem to choose learned 2 critical lessons. First, they no longer seem to hold upwards taking markets for granted together with are taking the travail to explicate non only what they are doing but why. Second, they seem to choose realized that analysts together with bankers don't atomic number 82 the market, but follow it. Nevertheless, the fellowship remains a corporate governance nightmare, alongside voting rights concentrated inwards Mark Zuckerberg's hands, but at to the lowest degree for the moment, he seems to hold upwards behaving to a greater extent than similar a benevolent monarch than a malevolent dictator. 

Incorporating the data inwards the in conclusion earnings report, I tweaked my valuation of Facebook together with the discussion "tweaked" is used intentionally. None of the big intelligence inwards the earnings reports represents meaning departures from assumptions made inwards before valuation. The skilful intelligence inwards revenue increment together with operating margins was already beingness assumed together with the fact that Facebook remains an advertising driven fellowship puts limits on how big revenues tin give notice get. My gauge of value per percentage for Facebook has risen from $24/share at the depths of despair in conclusion August to virtually $27.65/share today (July 31, 2013). As always, you lot are welcome to download the spreadsheet together with supercede my assumptions alongside yours.

So, what now?

The onetime "buy together with hold" advice, where nosotros are told to purchase skilful companies together with acquire out them inwards our portfolios for posterity, makes footling feel alongside increment companies, where markets ofttimes over shoot together with nether shoot. Last August, it was my belief that markets were over reacting to express data inwards an earnings written report from a immature fellowship together with pushing its cost downwardly likewise much. Today, I believe that the markets are over reacting over again to express intelligence from an earnings written report together with pushing the cost upwards likewise much. As an investor who was lucky plenty to purchase in conclusion August, because the stock was trading below my gauge of its intrinsic value, I choose to hold upwards consistent together with sell, if the contrary holds now. The only pragmatic consideration that I choose relates to taxes, since I volition relieve substantially, if I tin give notice hold back until September 4 to sell (when my gains volition locomote long term upper-case alphabetic lineament gains).

So, what if you lot don't ain the stock? Should you lot sell short? I personally would not, since it is exclusively possible that the momentum game that was then firmly against Facebook in conclusion twelvemonth mightiness run inwards the other management now. There may hold upwards investors who volition hold upwards drawn inwards to the stock if it crests the $38 IPO price, though at that topographic point is actually no economical or value significance unopen to the number. 

One terminal note. Even though I am selling Facebook, I volition locomote along to follow the company. After all, the fellowship may really good autumn out of favor alongside investors inwards a few months together with hold upwards dorsum on my purchase list. Bipolar markets are sometimes an intrinsic value investors best friend.

My previous posts on Facebook
The IPO of the decade: My valuation of Facebook (February 16, 2012)
Facebook: Playing the IPO popular game (February 26, 2012)
Facebook together with Field of Dreams: Hoodies, Hubris together with Hoopla (May 17, 2012)
Facebook: Sowing the wind, reaping the whirlwind (May 23, 2012)
Facebook confront plant: Time to friend the fellowship (August 20, 2012)
Much ado virtually liquidity: Lockup Expirations together with Stock Prices (November 19, 2012)

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