Facebook’s stock should trade for $13.80 Here’s a fair-price calculation for Facebook
Facebook’s stock should trade for $13.80
Commentary: Here’s a fair-price calculation for Facebook - . So, in order to entice someone to invest in it today, Facebook needs to offer a handsome return. Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80.
CHAPEL HILL, N.C. (MarketWatch) — Well, then, what should be the price of Facebook’s stock?
Rather than endlessly rehashing the events that have taken place over the past week, it is this question that investors should be asking. Surprisingly, however, few are doing so.
And yet, courtesy of a just-released study, calculating a fair price for Facebook’s stock isn’t as difficult as it might otherwise seem.
The study is entitled “Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996–2010.” Its authors are Jay Ritter, a finance professor at the University of Florida, and two researchers at the University of California, Davis: Martin Kenney, a professor in the Department of Human and Community Development, and Donald Patton, a research associate in that same department. (Click here to read a copy of their study.)
The researchers found that the revenue of the average company going public in the period analyzed in the study grew by 212% over the five years after its IPO (excluding spinoffs and buyouts). Assuming Facebook’s revenue grows just as fast, and given that the company’s latest-year revenue was $3.71 billion, its annual revenue in five years’ time will be $11.58 billion.
Since Facebook (US:FB) is most often compared to Google (US:GOOG) , let’s assume that its price-to-sales ratio in five years will be just as high as Google’s is currently: 5.51-to-1. You could argue that this is an overly generous assumption, of course. But it nevertheless means Facebook’s market cap in five years will be just $63.8 billion — 30% less than where it stands today.
Assuming that the total number of it