A Look At Facebook’s Valuation Following Steep Decline

Our valuation methodology suggests that Facebook’s (NASDAQ:FB) stock is worth $193, which is around 15% ahead of the current market price. This is largely due to the fact Facebook’s stock price plummeted about 15% after reports indicated that data analytics firm Cambridge Analytica may have harvested data of around 50 million profiles from Facebook, which resulted in massive negative sentiment and backlash against the company. However, over the long run, we forecast Facebook’s strong growth metrics to sustain a normal growth trajectory. We have taken conservative estimates for our full year forecast for Facebook’s expected 2018 results.

Our price estimate is based on a P/E multiple of around 24, slightly lower than the levels at which the stock has traded in recent years. Additionally, we expect Facebook’s net margins to be slightly lower this year, despite the recent trend of improving margins. We expect overall profitability to be slightly lower in 2018 due to an expected increase in operating expenses and potentially slowing revenue growth. We forecast Facebook’s operating expenses, both R&D and sales and marketing expenses, to outpace revenue growth through the year. As a result, we forecast Facebook’s EBITDA margin to compress by around 80 basis points through the year. Consequently, we have taken a conservative estimate for the company’s net margin, implying net income of about $28 billion for 2018. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers – such as segment revenue and income margins – for Facebook to gauge how changes will impact its valuation.

Advertising Revenue To Keep Up Growth Spree

Facebook’s total advertising revenues have increased at around 50-55% in each of the past three years. Revenue growth slowed down from 57% in 2016 to around 49% in 2017. This was driven by a 30% annual increase in average revenue per user (ARPU) in the same period, which slowed down to 28% in 2017. To complement ARPU growth, the total number of global users increased by mid-teens in the same period. The total user base stood at just over 2 billion in 2017. The user base growth has picked up recently due to its increasing presence in Asia-Pacific, while growth in active users has slowed down in Europe and North America. We forecast its user base to increase by around 10% with ARPU increasing by around 14% through 2018. As a result, total advertising revenue is expected to increase 25% from just under $40 billion in 2017 to $50 billion in 2018.

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