Stock Valuation: Facebook Inc. (FB)

 

Name of Company Country of Origin/ Exchange Traded Sector Stock Price
FACEBOOK INC US/NAS Technology – Online Media – Internet Content & Information USD187.67
@ 01 Jun 2018
COMPANY PROFILE Facebook Inc is the world’s largest online social network. Its products are Facebook, Instagram, Messenger, WhatsApp, and Oculus. Its products enable people to connect and share through mobile devices and personal computers.

Facebook is the world’s largest online social network, with more than 2 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. Its ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and via desktop. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada, and 25% from Europe.

Stock Code FB
Stock Valuation Below

The Price to Sales Ratio is a commonly used valuation indicator for a stock. While not as popular as the Price to Earnings Ratio, it overcomes some of the limitations of the PE Ratio in that it can be used even when the company is not making a profit or only making minimal profits. However, it should not be used by itself because a company may be achieving sales but not profits.
Companies that are trading at high Price to Sales ratios, like this company, do so because historical revenue growth has been high and investors are optimistic about future revenue growth. However, no company can continue to register the same high growth rates forever. Eventually it gets much bigger and growth rate will slow down. When that happens, one should adjust the expected future Price to Sales ratio in response to the expected slowdown in revenue growth and see if the current stock price is still justified, as what we have done below.

At the price of USD187.67 as at 01 Jun 2018, Facebook Inc is trading at a Price to Sales Ratio of 11.2 times last 12 months sales.  This is a 18.0%  discount to its historical average Price to Sales Ratio of 13.6 times.  Is the stock undervalued? Just by looking at Price to Sales Ratio, it seems valuation is not demanding even if we factor in a reduction in Price to Sales ratios in future years. However, one should not just look at a single ratio to determine the fair value of a stock.
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here. 
Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.

 

 

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