Saxo Bank (Saxo Bank)
World markets  |  February 05, 2013 11:21:14

Facebook: Are the shares overvalued?


Facebook (NASDAQ: FB) published last week its results for the fourth quarter of the 2012th Profit decreased by 79%, primarily due to higher investment. Revenues grew by 40%. How it looks with Facebook in the future? As the current valuation relates to future business?

The ratio of return on investment decreases - may return?

Our new valuační framework is focused on return on cash (cash return). It differs from the classical approach and based on the price / earnings per share (P / E), and better reflects future sales and price.

The following graph shows the gross return on cash invested capital (CROGC) since 2010 and includes the average cost of capital (WACC). Graph also shows that the ratio of return on investment (profitability spread) held about 3 before the company on the stock market. This means that the ROI was three times greater than its costs.   This is good for shareholders, because it increases the value of their investment. In 2012, there was a sharp decline in profitability of capital, IPO because the company has earned a lot of money, and thus an increase in gross capital firms and thus reduce profitability. Responded well and return on investment ratio dropped to 1.5. For the company, it is crucial that this trend reversed and returned to the level of the third area For comparison, Google (NASDAQ: GOOG) has this indicator at the level of about 2

Valuations seem high

According to the framework of return per share ratio exists between return on investment and a direct relationship valuačním spread (defined as the enterprise value of the gross invested capital).

If we build on the annual results for 2012, then the fair value per share of $ 14.50, which is roughly half today's prices. To this number we get when we multiply the ratio of gross investment return on invested capital (1.6 x 15,093 = 24,135), then subtract the net debt (24,135 - (-7270) = 31405) and then divide by the number of shares outstanding (31,405 / 2166.43 = 14.50).

Now the spread is pushed down by large investments, and therefore does not have the future too much interpretive value. If you use the ratio value of 3 get $ 24.30, which is 22% less than yesterday's closing price in New York. Spread profitability 3 is but a half larger than Google. Return to previous levels will therefore be very difficult for Facebook.

Overall, the valuation seems to be overpriced which is confirmed by the market reaction to the published results. Unfulfilled expectations have led to a wave of sales of shares.

For shareholders return ratio is a key investment and growth in gross capital

To understand the valuation and future share prices in this valuation approach is important to understand one more factor - the growth of gross capital invested. It's pretty simple. If we return on investment ratio such as 2, as Google has, we can profitably invest in our business and create value for our shareholders. This is exactly what happened at Google. Google maintained a return on investment ratio of about 2 since 2005, but gross invested capital grew by 35%. This resulted in an almost doubling of the share value despite the fact that according to the data from 2005 was heavily overrated. Which of the lesson?
Lesson is that, thanks to the magic folding over time and stable relationship return on investment along with increasing the capital invested may share price in future growth.So if Facebook will return your investment return ratio back around 2 and invested capital will increase by 20-25% per year, then at the current price in the next five years to overcome their performance market.

Facebook will be important for the further development of mobile services, which now account for 23% of advertising revenues. During a conference call Mark Zuckenberg said the firm will increase revenues per user thanks to new tools for advertisers. This will be important because the growth of new users slowed. In addition, responses of advertisers in beta version Facebook Search were strongly positive, so company definitely has interesting possibilities.

Despite these long-term prospects are pre-consolidation price may look up to $ 25. At this level, long-term investors who seek exposure to future developments, should consider buying.

Peter Garnry, equity strategist at Saxo Bank

 Globální online investiční banka

Saxo Bank je globální investiční banka specializující se na online obchodování a investice na mezinárodních finančních trzích. Saxo Bank umožňuje soukromým investorům a institucionálním klientům obchodovat s FX, CFD, cennými papíry, futures, opcemi a dalšími deriváty a poskytuje i profesionální správu portfolia a fondů díky svým online obchodním platformám oceněným řadou různých ocenění.

Více informací na: www.saxobank.cz

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