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Facebook Is More Valuable Than You Think

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The Facebook (FB) stock sell-off continues. Shares of the social networking site fell nearly 4 percent on Wednesday to close below $21 a share. The stock has dropped 28 percent in the last five days and is down almost 33 percent in one month. Facebook's market capitalization - once as high as $104 billion - registers now at $39.2 billion. But, as I noted last week, most financial and market data sites are wrong about a key piece of information for Facebook.

These sites, which include Yahoo Finance and Google Finance, ignore the company's outstanding "Restricted Stock Units," stock options, and other share equivalents.

As a result, they're showing market capitalizations for Facebook that are 10%-25% too low.

In other words, Facebook is still valued far more highly by the market than most people think.

The details are below. Before I go into them, though, here's more background.

There is a lot of confusion about one very important metric for Facebook--the number of shares of stock that are outstanding.

This number is critical, because it determines the value the market is placing on the company.

The equation is simple:

The share price X the number of shares outstanding = the market value.

(Yes, if you want to value the business, specifically, you can adjust for cash, debt, and off-balance assets, but the value of the equity is the share price times the shares outstanding).

Many, many sources of market data are wrong about Facebook's valuation.

Yahoo Finance, for example, says that at today's trading price, ~$21, Facebook is valued at "$39 billion."

Google Finance says exactly the same thing.

And so do many other sources.

This is incorrect.

These sources appear to be using a share count for Facebook of about 1.9 billion. (1.9 billion X $21 = $39 billion)

Meanwhile, Wall Street analysts are all over the map. Some analysts are using share counts for Facebook that are under 2 billion. Others are using the same counts as Yahoo and Google: 2.1-2.2 billion. Still others are using the correct share count (per the company) of about 2.74 billion.

The disparity of share counts was making me crazy, so I double-checked with the company. Facebook confirmed that the correct share count is about 2.74 billion.

This means that, at ~$21 per share, Facebook is currently valued at $58 billion.

Why is there so much confusion about this?

Because Facebook has lots of "share-equivalents" outstanding that should be included in the "fully diluted" shares outstanding calculation, which is the correct metric to use when you're trying to determine the value the market is placing on the company.

Specifically:

In Facebook's most recent SEC filing, the company reported that it had 2.14 billion shares outstanding, including both Class A shares and Class B shares.

That is the "basic" number of shares outstanding, which shows the number of shares that are actually issued and outstanding at this moment.

In addition to these shares, however, Facebook has also promised to deliver an additional ~600 million shares that should be included in the fully-diluted share count.

These include:

  • ~400 million shares to be issued to employees in connection with Restricted Stock Units (RSUs),
  • ~150 million stock options, and
  • 23 million shares to be issued in the purchase of Instagram.

Add all those together, and you get the 2.74 billion.

Facebook explains this here, in a public FAQ:

As of June 30, 2012, we had approximately 2,141,600,000 shares of common stock (which includes both Class A and Class B common stock) outstanding and approximately 576,900,000 shares of common stock subject to outstanding equity awards. In addition, at June 30, 2012 we had approximately 23,000,000 shares of common stock issuable upon the closing of our proposed acquisition of Instagram.

In any event... with the stock at $21, Facebook is valued at about $58 billion.

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