I didn't buy Facebook (FB) and I don't short. My view ten days prior to the IPO was that the shares were worth $15 so I wasn't surprised when after a little spike to $45 after Mark rang the bell; then pretty soon prices slumped.
But they didn't go down to my number or anywhere near that; so I was right and I was wrong. Although to be fair, $15 was a bit of a devil's advocate plus attention seeking.
In retrospect it looks like Morningstar, S&P Capital, Ben Rose, Damodaran and Henry Blodget were both closest to the mark, there again they all put out their analysis after the IPO so I'm not beating myself up, plus I imagine the market is looking at the big names when they make their own decisions and taking the average.
Of course that's if the price these days after the markets calm down properly reflects what some people call Fair Value and some call Intrinsic Value and that International Valuation Standards calls Other than Market Value; the next call is where they will be a year from now after a couple of earnings reports; my view is still down but it looks like the market now has priced in current expectations.
Everyone who got reasonably close did an income capitalization valuation. The differences were in opinions on (mainly) where the revenues would be in ten year's time, to some extent on what the profit margins would be and a little bit on what discount factor to use to work out NPV.
Revenues in the future are always a big imponderable which is why you use a big discount factor, I guess "the market" today is more confident about Facebook's potential than I was; and it's quite possible they are right and I am wrong; after all like Niels Bohr said, prediction is hard, particularly about the future.
There is another way to do a valuation, which can often provide a good check.
Suppose we say $45 on day-one was a bubble, which actually was reflected in some OTC trades prior to the IPO, and that bubble was caused by the usual suspects … madness of crowds, hype, asymmetry of information, too much loose money floating around.
Then there was a bust, and "markets overshot" all the way down to $25.5.
What that means is prices overshot the Fair Value. I'm using that expression by the way because everyone else does; although I don't like it, first because "fair" has got nothing to do with value, and second because accountants use Fair Value to talk about market value (i.e. mark to market), which something else completely.
What Bubbleomics says is that "Fair Value" in a clean pop is exactly equal to the square root of the product of the highest number at the top of the pop multiplied by the lowest number at the bottom of the pop.
So the square root of $45x $25.5 = $33.8.
You can do a valuation like that on the back of an envelope, which is often the best way to do any sort of valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
