What's Wrong With My Valuation?

So I did a Facebook DCF, and getting a very high stock price of $174.52. Can someone maybe comment if this is correct? Seems a little high for me, so I am not sure what I am supposed to fix to make it lower and more reasonable.

Edit (1): I fixed it again, and it is at 168 now. Not sure if this is still a little high.

Edit (2): fixed the "terrible" formatting.

Any suggestions would help!

AttachmentSize
PDF icon FB Snapshot DCF v8298.78 KB
Office spreadsheet icon Excel File42 KB

Comments (15)

May 31, 2016

Not to be rude, but your formatting is terrible. Some numbers have decimals, some have no decimals, some show two decimal points, some show one, some negative numbers are in parenthesis, some show negatives signs...

One thing that seems really high is your terminal multiple. I don't work in a tech group, but 19.3X EBITDA is very high. Where is 19.3X coming from? Again, I don't work with tech companies, so I could be mistaken.

May 31, 2016

Fixed the formatting. Thanks for pointing it out. I was focusing too much on the numbers.

As for EBITDA multiple, I actually used the assumptions I read from an equity research report. Was it ok to do that?

It ain't what you know, it's who you know

May 31, 2016
Alibabes56:

Fixed the formatting. Thanks for pointing it out. I was focusing too much on the numbers.

As for EBITDA multiple, I actually used the assumptions I read from an equity research report. Was it ok to do that?

Was the EBITDA multiple in the research report an LTM or NTM number? Or was it the exit multiple they assumed in a 5yr DCF?

Big difference for a growth company.

May 31, 2016

I would recommend that you post the excel version because that .pdf version doesn't help us help you lol. If you post the excel we might be able to track calculation errors, or aggressive assumptions that is most undoubtedly the case.

May 31, 2016

Thanks! Posted the Excel file.

It ain't what you know, it's who you know

May 31, 2016

19.3 EV/EBITDA is an incredibly high multiple for any company. Apple's is less than 10 currently, for example.

May 31, 2016

Equity research reports can be overly optimistic. You should look at a bunch of equity research reports and create a range of multiples from which you should pick the mean/median to stay conservative.

    • 1
May 31, 2016

Thanks!

It ain't what you know, it's who you know

May 31, 2016

A few things:
1. All your projections are based on estimates, which inflate the value of your assumptions by a lot. I would start by putting down a couple years of actual figures so that the assumptions are a little more concrete. Your growth figures seem a little aggressive as well (i.e. You project growth at pretty high rates, if you look at historical data the numbers are much less.) Same thing pertains to your depreciation numbers, so I would go back and revise the entire model and the growth rates you use.
2. Your tax rate also seems pretty high, I did a quick tax calculation for the past couple years and your tax rate of 32% is not reflective of the actual tax rate.

To be very honest, I just looked at those few things and found inconsistencies/issues. I would go back and edit the model and be more in-depth. Also, not sure where you picked up your beta from but I would actually go back and add a couple more sheets (One with hard-coded previous years' data --> 5 years should be good). You can make assumptions about growth rates from here based on historical numbers.

Would also add a Comps sheet, so that you can do things like un-lever and re-lever beta to have a more accurate number for beta. Also would recommend cleaning up the model a little more, the numbers are everywhere and don't have a consistent flow.

I will say this, if you're making this for practice good on you - keep grinding a couple more of these (also would recommend creating full operating models). These will go a long way in improving your understanding/modelling skills.

Good luck.

May 31, 2016

Thank you for this! Awesome advice!!

It ain't what you know, it's who you know

May 31, 2016

Your projected growth rate is very high (~20% CAGR in explicit forecast period); your discount rate is very low (the discount rate you would expect from stable cash flow generating, mature business) and your exit multiple is through the roof. Who would pay 19.3x EBITDA for facebook? Better yet, who could pay that much for it?

Beta needs to be higher; consider company specific risk premium; consider size premium; consider revised growth estimate; consider replacing exit multiple with gordon growth capitalization rate based on a reasonable long-term growth rate.

Jun 3, 2016

hey I'm trying to see where you pulled out all this information? I'm currently using the sec filings

Jun 4, 2016
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It ain't what you know, it's who you know