VALUATION PROJECT
For the group project, you will perform a valuation of Facebook (FB) and explore how markets updated about Facebook in the summer of 2018. The accompanying spreadsheet contains financial statements and returns data for Facebook. For this valuation, please make marketable securities or cash the plug in your pro-forma analysis. Please clearly state the assumptions you are making concerning cost of capital, growth rates, financial ratios, etc. Why did you choose them?
You should produce a price per share for Facebook as of year-end 2017. The price for Facebook as of Dec. 29, 2017 was $176. Based on your model, would Facebook have been a BUY or a SELL at that price? You may make a conditional recommendation (for example, BUY if the stock hits $X/share etc.). The decision to short sell the stock is also a possible recommendation.
On July 25, 2018, Facebook closed at $217.50 per share. The next day it closed down almost 20% at $176.26, erasing about $120 billion in market capitalization. Using your model, approximately what change in the sales growth rate over the following few years would justify the sharp drop in stock price seen in July 2018?
Please create a PDF summarizing your valuation that concisely answers the questions above (2-4 pages text) plus additional exhibits. The exhibits should include the inputs to your model, proforma financials, the DCF model, and cost of capital calculations along with any other analyses you deem important.
Please submit your PDF and your Excel model. Only one submission per team is required.
Some Notes:
- Facebook projects that amortization expense will be $633, 540, 365, 265, and 29 million over the years 2018, 2019, 2020, 2021, and 2022. These expenses reduce Intangible Assets on the balance sheet.
- Net income also reflects a non-cash expense related to stock-based compensation. Outstanding stock options for employees represent another non-equity claim (like debt) that should be deducted from enterprise value to arrive at total equity value. The intrinsic value of outstanding options as of 12/31/2017 is $462 million.
- You may assume that Goodwill and Debt remain at their current values.
- Shares outstanding as of 12/31/2017 were 2.905 billion.
- The aim of this project is to build your own valuation model. You are not permitted to use ready-made valuation models. You are allowed to use public information like 10-Ks, etc.
Solution
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