Wall Street struggles to find Facebook's worth


In its three days of trading, Facebook's stock has dropped 18 per cent from its $38 issue price.

For the thousands of investors that bought at the IPO, that's bad enough, but one analysis of its earnings prospects suggests it could get a lot worse - more like $10 a share.

Setting aside the hype and the cultural phenomenon that is the online networking site, Facebook Inc would be fairly priced at $9.59, according to the smattering of Wall Street estimates analysed and modeled by Thomson Reuters StarMine.

Data from six brokerages modeled by StarMine forecast the company's estimated annualized earnings growth over the next 10 years at 10.8 per cent.

That's almost exactly the mean for the technology sector and far below the 24 percent growth rate implied by the current stock price.

Some analysts, however, see the stock returning to the $40 per share level it traded at last week.

"Investors are looking for much more growth than the analysts covering the company," said Greg Harrison, corporate earnings research analyst at Thomson Reuters.

Starmine's intrinsic value estimate incorporates analyst estimates for the next five years of growth and then models another five years of steadily slower growth trends based on industry averages.

It is possible that its data will change as more analyst estimates become available. Underwriters are restricted from issuing research on a company for 40 days, and Facebook has a number of underwriters, led by Morgan Stanley.

Investor confidence in the shares has been damaged after Reuters reported lead underwriter Morgan Stanley cut its revenue forecasts for Facebook in the days before the offering, in part because of comments from Facebook on mobile usage.

After pricing at $38, far more than the first estimate of $28 the company gave investors, shares have been sliding - at one point as much as 31 percent from the $45 peak hit shortly after it started trading Friday.

"Facebook right now is going for far more than what it's worth, it's like buying $1 for $1.98, it just doesn't make sense at this price," said Eddy Elfenbein, widely followed blogger and editor at Crossing Wall Street.

Starmine's analysis of Google Inc's value puts that stock at $680, assuming a growth rate of 10.1 percent for the next 10 years. That makes the Internet giant undervalued at $599 a share.

"Just from basic modeling the stock should be around $17 to $20 dollars, and that is with a lot of variables," Elfenbein said. "I would call that an ideal price. I would be interested in buying and I think that is a good deal for investors."

The $9.59 level is less than one-third of the trough of $30.94 hit on Tuesday.

Starmine's views sometimes differ markedly from the market's way of seeing fast-growing companies. For instance, Salesforce.com Inc currently trades around $149 a share - but Starmine sees it as a $31 stock.


Morgan Stanley told major clients of its forecast changes after Facebook filed an amended prospectus with the U.S. Securities and Exchange Commission (SEC), where it expressed caution about revenue growth due to a rapid shift by users to mobile devices.

Firms that are not underwriting IPOs often change forecasts during such times. At least of those, Susquehanna Financial Group, did so in a research note on May 14, lowering its quarterly revenue estimates for 2012 and 2013.

In the note, analyst Herman Leung references Facebook's regulatory filing from May 9, where the company said it was seeing more users in mobile where ads have less penetration.

"We lowered our numbers after they put out their updated S-1," Leung told Reuters in an interview.

"I don't know what the company had said to the underwriters specifically, or why the underwriters adjusted (their revenue estimates), but my guess it that's probably the reason."

Leung has maintained $48 price target on the stock. He said shares have fallen in part because underwriters overestimated the retail and institutional demand, along with allocation issues, and "noise" like General Motors' move to stop advertising on Facebook.

"That does not change my fundamental view of the company," Leung said. Susquehanna is a market-maker in the shares of Facebook.

Shares were down more than 8 per cent on Tuesday and volumes were still high, making Facebook the third-most active issue on U.S. exchanges.

"Almost without exception (brokers) are saying it is oversold, and it's a good opportunity to buy in the pullback," said Tim Murphy, general manager for the Americas at TIM Group, which transmits and tracks equity trade ideas from 750 brokerage firms for institutional investors.

"Some are saying it could be back in the $40 level in the next few weeks."

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