Facebook Stock "Value" Controversy

In May 2012, the formerly private social media giant, Facebook Inc., opened up on the NASDAQ (American stock exchange) for the first time. Pre-initial public offering (IPO) investors were able to invest at $6.50 per-share in a fundraiser between 33 different banks, which is typically and significantly lower than the stock price once available to the general public, $38.00 per share. In this case, nearly a 600% profit opening day for all those who liquidated immediately. What we will detail is the "accounting value" of Facebook versus the "economic value" of the company as this is where 124 surveyed stock analysts maintained serious disagreement with the valuation of Facebook shares at a six-month stock forecast.

Since the opening of Facebook stock in May this year, the company announced a per-share price of $38.00 in its SEC filings the day before its opening. With nearly 900 million Facebook users at the time and $5 billion in advertisement revenues generated over the previous year, the accounting value would have been $5 billion x 5 years (typical valuation) = a $25 billion "accounting value" in May. At $25 billion, if we divide the accounting value by the number of unique Facebook users in May, this would have given a per-share value of $27.78. At 1 billion users in October, the value of the stock at $5 billion in advertisement revenues slightly dilutes the accounting value of Facebook to $25.00 per-share.

In terms of "economic value," we already understand Facebook was generating $5 billion per-year by just selling commercial advertisement space. If and when Facebook decides to exercise alternative options for monetization, Facebook's economic value easily duplicates or triples, if not quadruples to over $100 billion per-year. Now, we can understand how underwriter valuations arrived at $104 billion on opening day, which is very misleading to the average investors who bought shares in the days following the IPO. At the moment, because Facebook does not generate this level of business, the accounting valuator will easily see an over-inflated price of 137% its value, opening day.

On top of the over-inflated accounting value, Facebook co-founder and CEO, Mark Zuckerberg, sold off $177 million worth of stock the first day although the U.S. mass media will publish that Zuckerberg will not sell off any of his Facebook shares until a year after its opening. This amount of liquidation might indicate why Facebook ended at $32.00 per-share on the NASDAQ, a drop in per-share price of 16%. Facebook currently stands at $21.18 per-share.

Legendary investor, Warren Buffet, has decided against investing in Facebook.