Facebook is suitable for the Enterprising Investor, but not the more conservative Defensive Investor, who is concerned with the lack of dividends, short operating history as a publicly traded company, as well as the high PEmg and PB ratios. The Enterprising Investor, on the other hand, is only concerned by the lack of dividends. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $0.11 in 2010 to $0.61 for 2015. This demonstrated growth does not support the market’s implied estimate of 60.51% annual earnings growth over the next 7-10 years. The ModernGraham valuation model operates under the assumption that no company can sustain such a high level of growth over the long term and therefore returns an estimate of intrinsic value below the market price at this time, leading to the conclusion that the company is overvalued by the market.
Be sure to check out previous ModernGraham valuations of Facebook Inc. (FB) for greater perspective!
Disclaimer: The author did not hold a position in Facebook Inc. (FB) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.