STOCKS VIEW: FB Should Trade For $13.80

US STOCKS VIEW: Facebook's Stock Should Trade For $13.80

Last update: 5/25/2012 10:05:17 AM

--Whether you focus on sales or earnings, Facebook shares are priced too high

--To justify price, Facebook has to grow much faster than the average 1996-2010 IPO

--Facebook so huge it will be difficult to maintain percentage growth

 
    By Mark Hulbert 
    A DOW JONES COLUMN 
 

Well, then, what should be the price of Facebook Inc.'s (FB) stock?

Rather than endlessly rehashing the events that have taken place over the last week, it is this question investors should be asking. Surprisingly, however, few are doing so.

And yet, courtesy of a just-released study, calculating a fair price for Facebook's stock isn't as difficult as it might otherwise seem.

The study is titled "Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996-2010." Its authors are Jay Ritter, a finance professor at the University of Florida, and two researchers at the University of California, Davis: Martin Kenney, a professor in the Department of Human and Community Development, and Donald Patton, a research associate in that same department.

The researchers found that the revenue of the average company going public between 1996 and 2010 more than tripled over the five years after its IPO. Assuming Facebook's revenue grows just as fast, and given that the company's latest-year revenue was $3.71 billion, its annual revenue in five years' time will be $11.58 billion.

Since Facebook is most often compared to Google Inc. (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.

Assuming that the total number of its shares stays constant, that works out to a price per share of just $23.26--in contrast to its recent closing price of $33.03.