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Facebook’s poor IPO doesn’t change the fact that it is a good business

There is quite rightly a lot of chat at the moment about Facebook’s poor showing post IPO, but the fact that the shares are down 30% doesn’t mean that Facebook is a bad business, it means that investors now think the $100bn IPO price was too high. 30% to high to be precise.

A couple of pointers on the underlying health of Facebook’s business:

In short Facebook is loved by its customers and is making good profits. There is no evidence that either of these two facts are changing and unless they do Facebook will continue to be a valuable business.

The problem lies in assessing exactly how valuable. Analysts seeking to put a price on young fast growing companies have to make assessments about the future that involve a lot of guess work and everyone knows that their conclusions may turn out to be wrong. That is why the valuations of companies are so hotly debated. When a company like Facebook IPOs the price is set by a process of consensus building amongst analysts and investors in the IPO, and whilst the fact that many parties agree on the price gives comfort it doesn’t alter the fact that everyone knows the price may turn out to be the wrong price. When the IPO is at a high valuation then the nervousness is intense and when the consensus collapses everyone runs for the hills. That happened at Facebook and has had the knock on effect of undermining confidence in the valuations of other fast growing internet companies (thanks to Alan Patrick for the chart).

Falling share prices create challenges for these businesses for sure, but their fundamentals remain the same.

  • http://en-gb.facebook.com/people/Dan-Lester/534210316 Dan Lester

    Agreed on your main point, but if you *really* want to be precise, those investors thought that $100bn was 42.9% too high…

  • http://www.theequitykicker.com brisbourne

    ;-)

    Sent from my Windows Phone
    ________________________________

  • http://www.finmouse.com/ Andrei

    Isn’t 15x-20x EBITDA or around the max normal value for a growing high tech company?
    that maybe 10 billion for Facebook.

    I don’t see any huge growth rate at horizon plus usage is switching from web to mobile which is not as profitable as web.

    They already have the high revenue markets. Engagement is already very high (people still need to have a life besides Facebook).

    Apple P/E – 14. Facebook – almost 70 ??

    It is a very good business just hugelly overvalued. And nothing lasts forever.
    There is not enough growth left in the main business and I really doubt they will be able to diversify.

    I think 30% will soon become 50% high even 100% high..

  • http://www.theequitykicker.com brisbourne

    25x forward ebitda is what I always think of as ‘high’