Bud Labitan's  Instablog

A Rough Estimation of Facebook's Intrinsic Value

Does FB make for an intelligent investment or intelligent speculation today? Starting with a base estimate of annual Free Cash Flow at a value of approximately $950,000,000 and the number of shares outstanding at 2,140,000,000 shares; we used an assumed FCF annual growth of 15 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here:

http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=fb&stocktab=keyratio

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $11.14.

Market Price = $34.03
Intrinsic Value = $11.14 (estimated)

I used a discount rate of 6.25% and the Moat appears to be narrow and shallow. The Moat can last as long as Google or Yahoo or Microsoft do not design a friendlier website. Once one of the big cloud providers designs a friendlier interface, the moat starts eroding.

For example, if Google plus was easier to use, and it added features like a friendlier ebay style trading/barter/consulting it could take the lead. Thus far Google+ is too cumbersome and geeky to be useful. However, they are trying to make it better.

Bud Labitan
author of "The Four Filters Invention of Warren Buffett & Charlie Munger" and "Moats: The Competitive Advantages of Buffett & Munger Businesses"

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Disclosure: I am long BRK.A, BRK.B.