Revising Facebook's Fair Value
L&F Capitol Magement - Seeking Alpha
Feb. 7, 2015 6:14 AM ET
Facebook has continually beat earnings, and we believe this trend will continue.
We believe Facebook should see slower growth going forward in 2015, 2016, and beyond.
Our analysis yields a fair value of $85 per share for FB.
Three months ago, we reaffirmed our $90 price target on Facebook (NASDAQ:FB). We have revisited that price target, and have lowered our target to $85 per share.
In FY2014, the company beat analyst earnings estimates in each quarter, summing to a total beat of $0.28. Let's assume FB can beat by half of that much in FY15 and FY16, representing slowed growth (we don't believe FB's business reasonably warrants a sustained 50%+ EPS growth), while still accounting for FB's continued outperformance.
This implies growth rates of roughly 90% and 30% in FY15 and FY16, respectively, on top of 83% growth in FY14.
If we apply a regression analysis to these EPS growth rates since 2013 (FY14, FY15, and FY16), we can see that EPS growth is expected to dramatically decline before stagnating above 0%.
We believe this reverse hockey stick chart accurately represents Facebook's growth going forward, considering Facebook is a somewhat topped-out business with a terrific business model, attractive fundamentals, and a solid balance sheet. We believe growth should continue due to increased internet usage worldwide, which we detailed in our first article.
Further, we can see that this reverse hockey stick growth pattern is not unique to FB. Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) EPS growth since 2002 closely resembles a hockey stick pattern. Google is a company whose high-high growth ended in the early 21st century, but has sustained very solid growth since then. We believe Facebook is entering a very similar era, again due to Facebook's already high popularity.
This regression analysis yields an average EPS growth rate for FB of roughly 40% between 2015 and 2019, and of roughly 6.50% in the 30 years thereafter.
Given that growth could hit and even go below 0% (which this regression analysis does not account for), we assume these growth rates are overly optimistic even for the most optimistic scenario for FB. For our model, we slice these rates by 10-20% to account for this over optimism (assuming 10-20% of the time, growth could stagnate or go negative), and thus arrive at growth rates of 30-35% between 2015 and 2019, and roughly 5% thereafter.
Analysts peg growth rates around 35% for FB over the next five years, so our analysis agrees this is the most appropriate short-term growth rate.
We do, however, believe that growth rates could be far less, given 35% is a relatively large 5-year growth rate. We do affirm Facebook will grow earnings over the next 5 years, so we establish a lower bound of 5%, an accurate representative of a pedestrian growth rate less than the market rate.
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