Who Cares About
Quarterly EPS for Facebook?
Gregory V. Milano | October 23, 2012
While everyone's focused on quarterly earnings per share in today's call, what really
matters is whether FB is investing to sustain growth and return over the long term.
CFOs should listen in.
Later today, when Facebook executives report on their most recent quarterly financial results,
many journalists, analysts, and investors will draw sharp comparisons between the actual
earnings per share (EPS) results for the quarter and the consensus analyst expectations of
11 cents per share.
The irony is that the vast majority of the drivers of FBís valuation concern how well
performance can be sustained over time rather than a mere quarterly result. Thatís true of all
companies, but particularly so for a company trading at such a lofty valuation multiple.
In early trading this morning, FB is valued at just over half the offering price of their initial
trading less than six months ago. Many view this as a disaster. But even at the current price
of just over $19 per share, the price to forward EPS multiple is about 36x, which is higher
than 96% of the companies in the S&P 500.
This is a higher valuation than AOL, Baidu, Google, priceline.com,
Yahoo!, and Yelp. Only LinkedIn trades at a higher valuation multiple
among companies labeled as comparables by CapitalIQ.
We estimate the cash-on-cash return on capital for FB based on 2012 consensus figures to
be 72%, which is higher than 94% of the largest 1000 non-financial US companies. This is
extremely high profitability per dollar of investment. Note that this measure of return doesnít
include cash as an invested asset and makes other adjustments aimed at better aligning the
return measure with valuation.
The consensus forecast for revenue growth for FB is about 28% per year for the next two
years. Using a simple discounted EPS approach, investors would need to believe this rate of
growth can last five years or so before settling back to a more normal rate in order to believe
the current share price is fair. And this analysis assumes the extremely high rates of return
stay where they are as well.
So the real question when considering whether the FB share price is too high or too low is
not about this quarterís EPS at all. Rather, itís this: can Facebook sustain the high growth and
returns for a minimum of five years? Investors should listen closely to the earnings call to
judge whether management is making adequate investments to continue to differentiate their
offering, attract more and more users, and find ways of turning each user into more and more
CFOs working for companies in similarly dynamic industries should listen in for the strategic
lessons the FB call might provide. Can management sustain growth and returns despite the
shift of usage away from PCs and toward greater use of mobile devices? Or is social media
such a changing market segment that somebody else will leapfrog them much just as
MySpace was leapfrogged? How defensible is the strategic position of Facebook?
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This is a higher valuation than AOL, Baidu, Google, priceline.com, Yahoo!, and Yelp. Only LinkedIn trades at a higher valuation multiple among companies labeled as comparables by CapitalIQ.
How defensible is the strategic position of Facebook? Can management sustain growth and returns despite the shift of usage away from PCs and toward greater use of mobile devices?
Does this suggest that FB is still expensive?
Gregory V. Milano, a regular CFO columnist, is the co-founder and chief executive officer of Fortuna Advisors LLC, a value-based strategic advisory firm.