Aswath Damodaran, NYU's legendary finance professor, has made two monster calls in recent weeks: 1) He sold Apple near the top after holding it for 15 years. 2) He said Facebook would be a "Goldilocks IPO"—not too hot, not too cold.
That latter call may still be up for debate. But the bottom line is that it neither surged, nor totally collapsed.
In a new guest post on Forbes.com, Damodaran offers a valuation for Facebook: $29 per share. That gives the social network a market capitalization of about $70 billion.
"Yes, Facebook can be valued," he wrote.
Here are the assumptions and caveats he employs in his valuation model:
- Revenue growth : "...If the company can maintain a compounded revenue growth of 40% for the next 5 years, with growth rates scaling down after that towards the growth rate of the economy, the firm will have revenues of $44 billion in ten years, which would put it on the same growth path as Google in its first years as a public company."
- Operating margins : "...If Facebook is able to maintain a pre-tax margin of 35% (close to Apple’s, and higher than Google’s) as a mature company, it would be pulling off a very difficult feat."
- Cost of growth : "As Facebook’s revenue grows, it will find itself under pressure to pay more for this growth ..."
- High risk : "There is significant risk in the company. In valuing the company, we use a cost of capital of 11.42%, which would put Facebook in the top quartile of publicly traded U.S. firms in terms of risk."
Damodaran, being a value investor isn't ready to buy. "With its user base, Facebook has the ingredients to generate sizable profits down the road, albeit with substantial risks along the way," he wrote. "At the right price, I would buy the company, notwithstanding the uncertainty about the future. At the IPO offering price or even at the price at which it is trading at right now, I would not."
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- Aswath Damodaran