Business Valuation – the Facebook example – PE ratio of over 67
There has been a lot of hype in relation to the recent floatation of Facebook – lots of people are recommending it as the stock of the future. With a little valuation methodology you can see why it is dramatically overpriced.
There is lots of talk about the average earnings multiple ( or PE ratio – price / earnings) of businesses who sell or list in this case ( which in some ways is just a sale to lots of people ) . The most recent Australian research ( March 2012 ) on business sales in the SME sector shows that privately held businesses are typically selling for between 2 and 4 times earnings – if your business has an EBIT ( earnings before interest and taxation ) of say $1m then it is estimated it will sell for between $2m and $4m. We often work with business owners to sell a business at a higher multiple – often part of this strategy is to sell to a listed company as they typically trade at higher multiples – the long term average PE ratio for the ASX is actually 9.6
So back to Facebook – which is currently trading at a PE of 67.1 – turnover is $3.7b and EBIT was $1b but the company is “valued” at well over $67b – by comparison Apple is currently trading at a PE of 14 and has a 5 year low of just 8.6 and a five year high of 39.4.
If you extend the maths just slightly – this means that if you invest $28.82 ( todays share price ) it will take Facebook over 46 years to derive the cash flow to generate this value ( cash flow per share is only 62 cents and in fact free cash flow is 0 )
Reminds me of a Warren Buffett quote I often refer to in seminars – ” Price is what you pay – Value is what you get “