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!
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.
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!
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