Lowered Outlook

We were skeptical of Facebook's valuation last February. We knew that the $38 per-share IPO price was too high.

However, at some lower price we would get in because of Mark Zuckerberg. As we wrote in May,

If Mark Zuckerberg has just a fraction of Jobs-like genius--which I think he does possess--then Facebook is cooking up a few (pleasant) surprises that no one outside the company is expecting. If the price falls to $25 I'll be interested, and at $20 I'm definitely a buyer.

But I didn't buy FB, even when it dropped to $17.55. I've had to adjust my sights downward because of a lowered growth outlook, caused specifically by FB's inability to glean advertising dollars from consumers' shift to mobile. Barron's said today that Facebook shares are worth $15:

At its current quote [$22.86 at Friday's close], Facebook trades at 47 times projected 2012 profit of 48 cents a share and 36 times estimated 2013 earnings of 63 cents. Compare that with Google and Apple, two proven technology growth stories, which both trade for about 16 times estimated 2012 earnings. Facebook is valued at $61 billion, or $53 billion excluding its estimated $8 billion in cash. That's more than 10 times estimated 2012 revenue of $5 billion. Google trades for half that valuation.

What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street's consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share.

If the above explanation is confusing, just focus on the two numbers circled in the "Current Year" column:

Earnings per share are expected to grow from 43 cents in 2011 to 49 cents in 2012. The six-cent increase represents a 14% growth rate. A good rule of thumb is never to pay a price-earnings multiple that is more than two times the growth rate (in other words, the so-called PEG ratio should be two or less). $0.49 [2012 EPS estimate] x 28 P/E = $13.72. In that light Barron's $15 is defensible.

If one believes that the projected 2013 EPS of 63 cents is reasonably solid, then one should probably buy Facebook even at Friday's $22.86. Paying 36 times earnings ($22.86/$.63) for a company growing at 31% is a value proposition. The price should settle in the mid- to high-30's, and the fact that it's not that high shows that most people don't believe the projections either. © 2012 Stephen Yuen