No one is going to invest in Facebook shares today if its price will be 30% lower in five years. So, in order to entice someone to invest in it today, Facebook needs to offer a handsome return. Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80.
Don’t like that answer? Try focusing on earnings rather than sales, and you get only a marginally different result. Assuming its profit margin stays constant (instead of falling as it could very well do as it grows), assuming its P/E ratio in five years will be just as high as Google’s is today, and assuming that its stock will produce a five-year return of 11% annualized, Facebook’s stock today should be just $16.66.
How can Facebook investors wriggle out from underneath the awful picture these calculations paint? By assuming that its revenue and profitability will grow faster than the average IPO between 1996 and 2010 — and not just by a little bit, either, but a whole lot faster.Read it at Market Watch
Facebook’s stock should trade for $13.80
By Mark Hulbert
(h/t Joshua Brown at The Reformed Broker)
Last week a friend texted me the following:
I wish we did a mandatory facebook short sale Friday. At what price would you buy?My response:
If only it were so easy. Personally I’d stay away but maybe $10?Looks as though my off-the-cuff response was not so crazy after all.