I am a long-time Facebook bear.
I first predicted the social boom's bust in June, 2011, in a column at “Seeking Alpha.”
I even called the day of the bust in an April post, also at “Seeking Alpha”: “The bubble starts to bust the day Facebook goes public.”
But the busting of a boom is not always the end of the story. Weak players will go under, as companies like Pets.com did during the Internet bust. But for stronger companies — and Facebook is the strongest social player out there — value will be found, at some price, by someone.
As of Monday’s close, Facebook was valued at about $42 billion. It should get even cheaper today, as investors digest how early investors like Peter Thiel are cashing out, as reported at Business Week. (Read More: Thiel Unloads Facebook Shares.)
By November more than 1.7 billion new shares will have been unlocked and become tradeable. Many of those shares, like Thiel’s, will have been obtained at pennies per share, or will have been grants to early employees. With no real basis in a stock with an iffy future, selling pressure will continue through the end of the year.
Still, there is value here. Take a look at Facebook’s balance sheet and you will see $10.1 billion in cash and short-term investments, as of June 30. The company booked $1.184 billion in revenue for that quarter. It had a huge run-up in administrative costs during that time, causing a loss, mostly related to going public, but it also had a huge increase in research investment during that same quarter, which is a good thing.
Michael Miller, a long-time PC Magazine editor whom I trust, noted in May that Facebook has built three big data centers on which it spent more than $860 million during the previous year.
Facebook is using an open architecture for both hardware and software and is focused on managing its infrastructure at the lowest possible cost.
If Facebook can return to the 20 percent after-tax margins it enjoyed in its March quarter, before the IPO, and stabilize, you’re looking at a company with annual sales of $5 billion, profits of $1 billion, and real opportunities for continued growth.
Facebook bears may think of Yogi Berra’s restaurant quote right now: “No one goes there any more, it’s too crowded.”
But the fact is Facebook does have loyal users, and it does provide services to them they can’t get anywhere else.
Facebook also has a large staff of talented programmers and has opportunities for international and mobile growth.
Facebook is not going away.
But what’s it worth?
Let’s use a multiple of sales to come up with a valuation.
Let’s also use Googlefor comparison.
Google has a market cap(explain this) of $220 billion and had $44.6 billion of cash and short-term investments on its balance sheet as of June 30.
Subtract the cash from the market cap and you get $175.4 billion. Then divide that number by the company’s revenue for the last fiscal year, which was $37.9 billion. You get a multiple of about 4.5.
If you consider Facebook the equal of Google as an investment proposition, you can use the same multiple.
Facebook has $10 billion in cash and $5 billion in annual sales. If you multiply 4.5 by $5 billion, you get $22.5 billion. Then add in the cash of $10 billion, and you get a Facebook valuation of $32.5 billion.
That’s about 23 percent less than Facebook’s recent market cap of $42 billion.
I’m going to round that percentage up to a nice 25 percent. That means Facebook is currently overvalued by about 25 percent.
That also means it’s a “buy” at about $15 a share, roughly 25 percent lower than recent levels. But figure you’re always going to overshoot in situations like this, and I see a market price of $13 a share, if CEO Mark Zuckerberg can hold things steady until it reaches that figure.
So by my back-of-the-envelope calculations, I’d buy Facebook at $13 sometime early in 2013.
—By TheStreet.com Contributor Dana Blankenhorn
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At the time of publication, Dana Blankenhorn had no investments in the companies mentioned in this article.