Select Page
Janelle Lee asked 5 months ago

Hi Victor, 
I was trying to value Facebook and am receiving conflicting results and am wondering I’m calculating correctly. Based on the average 5yr PE – the current price of 351.89 suggests that its an attractive buy as there is an MOS of approx 30%. I tried calculating the 10yr PE as well but the results were vastly different from the 5 yr PE (i think that’s because their growth only accelerated quickly in the last 5 years). 
I know DCF is super theory, but I did it nonetheless – and the results shows that they are trading below their intrinsic value (though very slightly – 4% MOS); which may not be a very strong buy?
I guess my question is also – it seems that average PE and hence intrinsic value that we are trying to calculate also factored in investor’s perception of the value of the Company, which differs slightly from Buffet’s view that the intrinsic value of a company is based on the projected owner’s earning discounted to the present value (a more conservative matrix). Would it be right to say then the tweaks we are making is because there has been a change in the way the market is behaving (i.e. we should be caught up with times and the new way in which investors are valuing businesses)? 
Appreciate the clarity. Thanks! 

3 Answers
Victor Chng answered 5 months ago

Hi Janelle,
 
Facebook had a higher PE ratio in the past so if you have plot your 5Y chart, there should a higher PE before 2017. Hence using the median PE should be a better figure. Our valuation, based on that is roughly at the fair value only. 
 
Yes, PE valuation is based on investor perception of the market but it does reflect the emotion the investors have on the company. What we want to do is to exploit human emotion by buying when they are trade below their average which in most cases give you a better price. 
 
You can use any valuation method as long as it work for you. DCF works too but the projection is a tricky part which may have error when projected. 

Vivian Tham replied 5 months ago

Hi Victor, I used the median PE to plot a 5yr and 10yr chart, but their intrinsic value differs alot. Which should I use now?

Victor Chng replied 5 months ago

Hi Vivan,

I had look through your chart and the figures are correct. Keep up the good work :)

In the past, FB was growing very fast which is why their PE are much high. Since then the growth had tapered, hence using the five years median PE to derive IV will make more sense.

Vivian Tham replied 5 months ago

Thanks for the clarification Victor :)

Victor Chng replied 5 months ago

Welcome Vivian :)

Janelle Lee answered 5 months ago

Thanks Victor appreciate the explanation! If you don’t mind would be great if you could help to take a look at the PE and hence IV that I’ve calculated in the attached excel is correct? Many thanks! 

Attachments
Victor Chng replied 5 months ago

Hi Janelle,

It is hard for to look through the figures in PDF. Can you send the excel to victor@fifthperson.com

I will get back to you here, once I look through it.

Victor Chng answered 5 months ago

Hi Janelle,
 
I just look through your excel. Your valuation method and calculation of IV are correct, there is no mistake in them. Good job and keep up the good work. :)
 
Just realised, our intrinsic value valuation is based on the FY2020 EPS.

Janelle Lee replied 5 months ago

Hi Victor,

Thanks for helping to look through my calculations! Super appreciate it! :)

Victor Chng replied 5 months ago

Welcome Janelle :)