essays pieces of the puzzle
Saturday, February 1st, 2014
valuation maps

14 0201 zFB

Facebook’s (FB) earnings this week garnered a lot of attention, with revenues and “adjusted” earnings coming in well ahead of expectations.

The top panel of the chart shows the average analyst target price versus the actual price of FB.  During the early months of the company being public, targets were persistently above the stock price.  Then they ran in tandem for a time.

Repeat after me, “A target price is a marketing device.”  Plus, combining them in this way is suspect, since there’s no standard methodology from firm to firm.  Most importantly, it would be nice to create a valuation map that shows what each of the 51 target prices actually means.  (Hopefully something other than “this price plus some more.”)

The middle panel has the consensus rating of those analysts (on a 1-5 scale).  Given the stock’s stumble out of the gate, the average rating was relatively low for quite a while, before marching higher with the stock.

At bottom are those “adjusted” (fake) earnings.  You can discount them 20-25% to get true GAAP earnings.  The chart clearly shows that FB has been surpassing expectations in recent quarters and the analysts have been reacting in turn.

The question now is what your valuation map should look like.  If we have a 2013 market environment, you probably won’t need it.  If FB keeps trouncing estimates, you may not either.  But you still should have one.

Some numbers:  The stock is trading at 8.6 times sales and 91 times GAAP earnings on 2016 estimates.  That’s three years from now.  (14.1 and 166 times, respectively, for this year.)

The results will be higher or lower than current forecasts.  And the stock price will be all over the place.  What map will you use to guide you?  (Chart:  Bloomberg terminal.)

testing ourselves

How do we assess our readiness to make investment decisions, as individuals or in groups?  The latest essay concerns testing ourselves for our knowledge, expectations, behavior, etc.