We would be buyers of Facebook™ at a price of $39 per share or lower. Anything higher than this would give us pause. If the stock opens higher than $39 we would watch the numbers carefully, probably three or four quarters, to get a sense of the balance sheet numbers and more importantly analysts’ consensus earnings forecast before purchasing shares. Obviously post IPO; Model Price™ will be tracking the numbers for our users.
For those interested, here is our analysis, …… numbers, in graphical format on Facebook™.
1. We picked up a price series from Bloomberg™. Apparently Bloomberg™ was tracking private purchases and sales, which we have downloaded. This provides great visuals for our users however not critical for our analysis.
2. When Google™ went public, in 2004, the stock was issued at EBV+7. This is our IPO estimate for Facebook™. Subsequent to their IPO, shares of Google™ tracked EBV+7 until early 2008. As the fundamentals grew, so did their stock price. Hopefully the same can be said about Facebook™.
3. Model price calculation is only $11.18. We believe that Facebook™ will be a situation, like others, where model price will grow substantially underneath future market pricing. One can see the long-term chart of Google™, or look to LinkedIn™ for reference.
4. We have written in the past of convexity. Here (NFLX) and here (AAPL). Convexity for Facebook™ will come in around 4, which is healthy. Remember, the S&P 500™, has a cap-weighted convexity of 1.43 and most large cap technology companies have convexity values around 2. As the balance sheet gets bigger, and the business matures convexity will recede, hopefully not as low as Google™ and Apple™, (subject of a future blog).
The hype on Facebook™ is huge. The “press” (old and new) is all over this one. We have no idea what will happen, but with everything we do, we’ll at least have a game plan. Be disciplined and focus on the numbers.
It will be fun to see what happens!