GRIM: Fair Value for Facebook May Be Only $56 Bn

Not everyone is excited about the prospects of a Facebook IPO. I am skeptical about the $100 bn valuation, even though the stock has been trading around there lately on SharesPost. The latest from Nadeem Moulvi on Seeking Alpha, however, is downright bearish. Moulvi takes a look at Facebook's financials over the past three years, its cash position and its future possibilities – he arrives at a fair value of $56 bn.

Here's what you need to know:

1. Projected growth rate: based on Google GOOG and Baidu BIDU, he gets to an average annual earnings growth rate of 50 percent over the next five years, followed by 15 percent for the five years after that and a terminal growth rate of 2 percent.

2. Operating margins: Facebook's operating margin is 46 percent right now, which is beyond solid. But, Moulvi doesn't see that being sustainable. Rather, it will fall over the next decade, he posits, hitting 30 percent in the tenth year. I suspect this could be stymied further by heavy internal investments that don't necessarily pay off. Let's not forget that Facebook is trying to both monetize and improve its mobile presence simultaneously – in a space where it hasn't done much to date.

3. No money: Facebook won't be pulling in any of the proceeds from its IPO, he notes. As a result, it won't have capital to fuel internal development or acquisitions. In fact, Facebook effectively states it has no idea what it's going to do with the IPO proceeds. That said, the company could wait until later for a larger secondary offering that will provide more fuel for growth.

Take a look at Moulvi's analysis for more detail on how he reaches a $56.28 bn fair value. It's certainly enlightening.

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Source: Seeking Alpha

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