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TheStreet Open House

Facebook's 'Option on the World' Valued at $4.50

Stock quotes in this article: FB

NEW YORK ( TheStreet) - New revelations about the rocky path towards Facebook's (FB) initial public offering are yet another indication that valuing the billion-plus member social network is as much science as it is art and an exercise in wishful thinking.

For those who want to double down on a price tag for Facebook, new calculations on Wall Street indicate that the company's inestimable prospects may be worth a paltry $4.50.

The consensus amongst investors is that Facebook's stock value will hinge on the company's ability to generate ad revenue from the social network, specifically revenues from mobile devices - an area where the Mark Zuckerberg-run company has been slow moving.

Still, when it comes to calculations on how to value Facebook's overall platform monetization and its expected mobile-based earnings, company estimates and analyst projections are notably imprecise. With that said, recent exercises in sizing up Facebook's finances point to a radically diminished, if not depressing outlook.

In assuming coverage of Facebook on Wednesday, Credit Suisse analyst Stephen Ju cut the social networker's price target by nearly 30% to $24 a share. The analyst cited lowered expectations that Zuckerberg & Co. will be able to execute on a mobile strategy, and if successful, that the opportunity is what was once projected. Facebook's price target cut highlights higher costs of capital assumptions - think risk - and more importantly, a significant re-rating of what the analyst calls the company's "blue sky" ad network, mobile advertising, and expanded payments opportunities.

In the analysis, Facebook's existing business is now worth just $20 from a previous estimate of $23 a share. As of 2011, Facebook had nearly $4 billion in annual revenue, a number that is forecast to grow over $5 billion this year, according to analyst estimates compiled by Bloomberg. More importantly, Ju of Credit Suisse values "blue sky" monetization opportunities -the hard-to-calculate growth of a billion member network that has some investors jazzed up - at just $4.50. That's a 60% decrease from Credit Suisse's previous estimates that future monetization efforts were worth $11.50 a share.

Notably, Credit Suisse's sharp cut is a result of diminished expectations that Facebook will prove successful in mobile, or in growing revenue opportunities on its network.

"Given the more nascent state of these businesses, we have elected to take a more conservative stance and attribute a lower probability of success at 50%," writes Ju, in the Wednesday note to clients that maintains a 'Neutral' rating on Facebook shares in spite of the sharp price target cut. "This reduces our valuation of Facebook's to-be-realized businesses to $4.50," the analyst adds.

Because of Facebook's whopping 2.14 billion outstanding Class A and B common shares, the $4.50 a share figure amounts to nearly $10 billion in market capitalization.

Previous to the austere figures being applied to Facebook in the wake of the company's weak post-IPO performance, rhetoric on the company's valuation and the opportunities present in its platform bordered on the absurd.

For instance, Needham & Co. analyst Laura Martin characterized much of Facebook's value as 'an option on the world,' when initiating Facebook at a valuation of $40 a share in late May.

"With over 900 million monthly unique users, we believe FB is an option on the world," wrote Martin. "Our point of view is that FB should be valued based on revenue potential from total minutes spent on FB times its powerful margin expansion engine," the analyst added.

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