Monday, 19 October 2015

Valuation – Time to Sell Facebook

Facebook, Inc. (NASDAQ: FB)
Technology; Internet Information Providers; Sell

It's time. Facebook is trading around an all time high of $98. The stock is getting ahead of the fundamentals now. Forward earnings of $2.75 translate into a PE of 35.8, which is above the consensus five year earnings growth of 28%. 

Our EVA model reveals a price target of $96.5 given earnings growth of 28% during the next five year. DCF valuation indicates a price of $83. Based on our valuation, we think that the stock is priced for perfection. Unless, there's some major progress related to virtual reality or Whatsapp monetization, investors should cash out and stay on the sidelines.

  • EPS is assumed to grow at CAGR of 25% during 2016-2020 in line with the consensus estimates. 1% growth is assumed in perpetuity
  • Earnings are assumed to increase  the total cost of equity.
  • CAPM is used to calculate the cost of equity. S&P 500 is used as a proxy for the return on market.


Observation: The stock gained 25% during the trailing twelve months. Now, the EVA based valuation indicates that Facebook has reached its fair price. As Facebook is trading ahead of its fair value, investors should channel their funds somewhere else.