1. A valuation on Facebook.
(Juan J. Romero, Sydney, Nov 2012)
Facebook
Share Price (Nov, 9th, 2012) $19.21
Common Stocks, in millions (Sep, 30th, 2012) 2,420
Market Cap, in millions (Nov, 9th, 2012) $46,488
Book Value of Equity (Sep, 30th, 2012), in millions $ $14,174
P/B 3.3
RESIDUAL EARNINGS GROWTH ANALYSIS:
Facebook 2012 (Sep, 2012 (Y! 2013 (Y! Finance
30th) Finance Earnings
Earnings Forecast)
Forecast)
BPS (Book Value of Equity, per $5.86 $6.38 $7.02
Share)
EPS (Earnings per Share) $0.52 $0.64
Book Rate of Return 8.88% 10.04%
RE if r=10% (Residual Earnings -$0.07 $0.00
with a required Return on Capital
of 10%)
Long-Term (2013 - 9.98%
doomsday) RE growth per
year, if $19.21 per share
Comments:
• All calcs based on forecasts (earnings) from Yahoo! Finance (average
estimates).
• The main risk of buying a share is paying too much for growth
expectations. The shareholder should only pay for growth that adds value:
o Earnings growth doesn't (necessarily) add value.
o Residual Earnings (earnings after charging a required return on the
book value of equity) growth measures the value added to the
shareholder.
• Given a market price and a short-term earnings forecast (2 years) the
implicit growth rate the market is expecting in the long-run is figured:

2. o If you buy today, $19.21 a share, you would expect residual
earnings growing at 9.98% per year, since 2013 till doomsday.
o Is that growth rate “reasonable”? → Benchmark.
Benchmark:
• Google:
o Trading at $663 a share, with a $39.82 forecasted EPS (2012) and
$46.39 (2013) should increase residual earnings 5.51% each year in
the long-run.
o If this growth rate is applied to Facebook the valuation’s outcome is
$5.84 a share. Facebook would be a 230% overpriced using this
benchmark.
• Why using Google as benchmark?
o Consolidated firm, same industry.
o All competitive advantage yielding high growth rates will be eroded
by competitors over the years. Consolidated companies in the same
industry can be used as a “reference” for valuation purposes.
o The market is expecting that Google will sustain a growth rate, in
the long-run, pretty similar to a standard GDP growth rate (2.5-5%).
Sounds reasonable to me!
• Finally:
o The required return on the book value applied in both cases was the
same (10%). Google is a more diversified company than Facebook,
so its business risk is lower, and so its required return on the book
value. The applied required return on Facebook should be higher. If
so, the share would be even more overpriced.
o With Google's growth rate, Facebook's market capitalization would
be even less, today, than its book value of the Equity!