Friday, August 3, 2012

"Face" value

What price would you buy Facebook at? I would buy it at 12$.

Now before you start screaming and shouting at my rather reckless prediction, I would ask you to give me a few minutes to explain this craziness. For that I refer you back to my earlier explanation of simplified DCF calculation where I had postulated that we should give about 1 point of P/E for every 5% growth.

If I look at the most optimistic estimates on Facebook, there is a projected growth of 50% in the near future. If I apply the simplified DCF calculation that gives me 10 points of PE and starting with a base line of 8.5 PE that would give me a acceptable PE of 18.5 from the current levels.

With the current year estimate of 55 cents at the high end that would make the share price about 10+$. If I were to give Facebook the benefit of the 900 million users and a successful mobile strategy in the near future and add an additional 30% to its growth rate, that would make it approx 25 PE and a share price target of 13.75$.

So there you go, I will buy it at its midpoint of 12$. Now the question is if I would actually have the nerve to buy it based on my instincts after an additional 40% drop from its current depressed levels.

That, only time will tell.