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Value Matters

Facebook Vs Apple, Microsoft, and Dell

I’ve gotten some emails from people asking about Facebook given its spectacular fall from the IPO price. How can that happen?

The answer is a bit puzzling from the standpoint of how could the principals involved price it for failure. If you look at it from a standpoint of valuation, there really isn’t much of a surprise at all.

Yesterday, I was chatting with Charlie and Karen and we were doing some back of the envelope analysis of Facebook’s numbers now that they are publicly available. I thought I’d put those into a bit more formal format for you and do some further comparisons so you can see what investors now see.

Below are some valuation ratios so you can see how Facebook compares to some other well know companies as well as the Internet Content Industry and the broader Information Technology Sector.

Price to Free Cash Flow Ratio
The higher this ratio, the more expensive this company is. What it represents is how many years an investor will have to wait for the company to generate free cash flow equal to the share price they pay for the stock.

Facebook: 98.46
Industry: 41.35
Sector: 38.76
Apple: 11.77
Microsoft: 11.62
Dell: 5.44

Price to Sales Ratio
This ratio represents the number of years an investor has to wait before the companies sales equal its stock price.

Facebook: 19.61
Industry: 22.83
Sector: 15.90
Apple: 3.69
Microsoft: 3.42
Dell: 0.42

Price to Book Value Ratio
This ratio tells us how many times the fair market value of the companies assets is an investor paying for the stock of the company. Again, lower is better.

Facebook: 15.62
Industry: 4.22
Sector: 3.39
Apple: 5.12
Microsoft: 3.64
Dell: 2.96

P/E Ratio
This is the most common valuation ratio and most people know that it represents the number of years an investor has to wait before the company earns its share price.

Facebook: 108.92
Industry: 18.47
Sector: 17.51
Apple: 13.68
Microsoft: 10.82
Dell: 7.96

Earnings Growth Rate
Unlike the previous ratios which represent valuation, this represents growth. A higher growth rate is better because an investor can justify paying a higher valuation for a company if they anticipate that the company’s earnings will grow more than its competitors.

Facebook: -10.45% (yes, their earnings shrank this quarter)
Industry: 27.21%
Sector: 88.02%
Apple: 92.28%
Microsoft: -2.23% (also a loss)
Dell: -11.07% (also a loss)

Sales Growth Rate
A company can have several things happen to its earnings, like reinvesting in its core business to promote future growth, so a savvy investor will want to see that their sales are growing despite what is happening to their earnings.

Facebook: 44.73%
Industry: 22.52%
Sector: 17.26%
Apple: 58.86%
Microsoft: 5.96%
Dell: 2.16%

It is clear that Facebook is priced for perfection in operations and definitely not a value proposition. Their sales growth numbers are admirable in spite of their earnings growth decline – but if you read about the company you know they are investing heavily in data centers and other server farms, all of which are extremely expensive and have a negative impact on net earnings.

On the chart above, I have a comparison of Facebook to Apple, Microsoft and Dell. You can see that the price path of the latter three has been up while Facebook has fallen significantly.

Now that Facebook is public and their numbers are available, investors can perform the comparative analysis above and decide where to put their money. Do they want to buy a company with great sales growth but whose price represents 108 years of future earnings? The vote so far has been a resounding “no.”

However, FB will find a valuation level that investors are willing to pay an above average P/E ratio for those earnings. And, if FB can find a way to monetize their business, increase their earnings, and show investors that it is a sustainable communication/lifestyle platform that people will use far into the future – and that they are not America Online redux which danced its way into the largest merger of all time with Time Warner before Time Warner spun it off as a $10 stock – it could prove to be a value at that point and go on to make investors a lot of money.


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Mark