fbpx

Facebook Could Be Worth $10

Facebook (FB) has taken a beating since going public, dropping from $42 at the first trade to $32 today. Still, the stock has three big clouds hanging over it.

  1. The mobile factor
  2. Does advertising on Facebook work?
  3. Could Facebook be maturing?

If Facebook is maturing, the stock could come down drastically. FB could be worth $10. Yes, ten dollars a share. Here’s my take…

Cramer Thinks Facebook’s Numbers Are Too High

In the video below, Jim Cramer thinks Facebook’s May numbers were too high. In fact he thinks the numbers were really bad. 

If that’s the case then FB cold miss revenue and/or profit estimates this quarter. Wow, if this is true it could be bad. Stocks that lower estimates in this environment get hammered. Some lost 50% this quarter. 

The Mobile Factor

People are using Facebook on their phones now more than ever. The problem with this is there’s not enough space for ads on the face of your phone. So there aren’t many ad clicks. As people migrate to using their phone for Facebook, they are moving away from using it on the computer. Until Facebook finds a way to get ads on the phone, the stock has to be looked at with uncertainty. Stocks with uncertainty get lower P/Es than stocks with certainty.

Does Advertising on Facebook Even Work

Just before Facebook went public General Motors pulled the plug on advertising on Facebook. The company said it didn’t work.

If you think about it — how often do you click on a Facebook ad anyway? For me maybe three times. You can’t say this is a Google. When we search Google we often search for something to buy. We don’t want to buy on Facebook. So maybe advertising on Facebook is a waste of money.

Could Facebook Be Maturing?

The combination of more people using Facebook on their phones combined with the uncertainty as to whether the ads are working makes me think Facebook’s revenue stream could be maturing. Here’s FB’s revenue forecast:

2011 $3.7 billion
2012 $5.0 billion (estimate)
2013 $6.5 billion (estimate)

So this year revenue is expected to climb 35%. If that number comes down, FB could post 20% revenue growth. That’s not a high-octane growth stock, and would likely take FB’s valuation from a high-octane stock to a mature stock (or at least a growth stock with uncertainty).

What a Mature Facebook is Worth

Could it be Facebook’s maturing? If so the stock could be worth $10. Here’s why…

FB is expected to make around $0.50 this year. Right now the stock is $32, so that’s 64 times earnings (64 x $0.50 = $62).

I think the high -octane growth stocks are worth 60 times earnings. Before FB went public I told investors (and Twitter followers) that FB was worth $30. Right now, FB is being priced as though there’s great growth ahead. If that perception changes, investors could value FB at 20 times earnings.

20 x $0.50 = $10

Sharek’s Take

I used to think FB would be buyable at $30. But that’s what it could be worth as a high-octane growth stock. Now you’d have to wait to $25 because you’d want to get the stock 20% undervalued.

After writing this article, I will be hesitant to buy even at $25. Facebook stock could be worth $10 a share.

Disclosure: Clients of David Sharek owned shares of FB at the time of publication.

Leave a Comment

Your email address will not be published. Required fields are marked *

Not a member? Sign up here for $25 a month.