Please Be Careful Who You Trust For Financial Analysis…..
Have you ever heard of TMZ? The celebrity gossip website/company? They have been able to grow thanks to many different things which including being able to write “Clever Headlines”. You know the type of headline that we all feel the urge to click on, share with friends, etc? I’m the first to be guilty sometimes. I guess there is little harm involved anyway right? At worse, I lose a few minutes of my time reading a story that is not what I would have expected from reading the headline.
The same exists in financial media of course… Most of you know how I feel about Facebook’s stock and how good of an opportunity it is. Last week, I saw a link to a post entitled:
Personally, while I think it’s possible that the author might have good points, seeing that headline will not make me take the author seriously. My main question is, does the author really believe this or is he just trying to create a viral article? I invite you to visit the article but I think the 2 main points that the author brings up are:
“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”
“Since Facebook FB is most often compared to Google 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.”
“the news is even worse: No one is going to invest in Facebook shares today if its price will be 30% lower in five years. 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”
Seriously!?!?!?? How in the world could someone remotely serious consider such numbers? I’m assuming that the author is smart enough to know that:
–Facebook is not exactly the average IPO. I don’t know how someone could possibly perform analysis based on such a factor, no matter what the company is.
-Using the price to sales ratio could be very useful in the context of an analysis but basing a valuation on these 2 very simple stats is oversimplication by any measure.
Let’s give it a try using a well known recently turned public company, which I have been very negative about, Groupon $GRPN. Let’s use the same methodology, so assuming:
–Revenues will increase 212% as does the average IPO from $1.6B to $5.02B…. That would result in a market cap of over $27B using the same multiple which gives us a price per share of $43!!! Given this is 5 years from now, we will discount it using the same rate which gives me a stock price of over $25!!..
So is Groupon trading at half of its value? I certainly don’t think so. Financial analysis is very complex and while I can very much accept that some believe that Facebook is not worth anywhere near its current valuation, I need to see some type of argument. Don’t just bring me a 2 minute analysis that is complete B.S… Please:)
P.S: I’d more than happy to do a trade with the Marketwatch author… you sell me options to buy Facebook at $23.26 5 years from now… In return, I will gladly sell you options to buy Groupon for $40.. A $3 discount from its expected value using this “scientific analysis”… Anyone up for this trade?:)If you liked this post, you can consider subscribing to our free newsletters here