No one can say for sure why Facebook‘s (NASDAQ:FB) stock crashed so badly just after its public debut, though it can be attributed to many reasons like NASDAQ’s reported screwup, an over-estimation of investor demand by Facebook’s lead underwriters, a very high float due to many insiders cashing out, and most importantly, concerns over Facebook’s lagging revenue growth due to its inability to figure out how to efficiently monetize its growing mobile audience.
Facebook’s stock price reached an all time low of around $25, nearly 35% below $38, the price it went public at, spurring a flurry of “I told you so” comments by almost every stock expert and his grandmother, who were earlier gushing over how Facebook would easily hit a $100 billion valuation.
We arrived at a $33 Trefis price estimate for Facebook, based on a discounted cash flow valuation of Facebook and a detailed analysis of its future prospects while accounting for the added uncertainty about its advertising business due to its international expansion plans and the rising proportion of its mobile audience which is hard to monetize.
In the last week, Facebook’s stock has slowly gained and inched higher towards our fair value estimate for the company. Now, again, there might be a number of reasons why Facebook’s stock is gaining, which may not be related to the fundamentals driving its business at all, but ultimately, we believe that Facebook’s market price will converge with its fair value, which is what we are trying to deduce, ignoring all the other noise in the market.
We will be revising our Trefis price estimate for Facebook after it reports its Q2 2012 earnings, if the numbers reveal a wide deviation from our forecasts. For now though, Facebook seems fairly valued at $33.