This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Facebook's Value Is No Trick Question: Street Whispers

NEW YORK ( TheStreet) - Before every Wall Streeter made it into the limelight of a trading floor or investment banking suite they had to correctly answer questions like these:

How many ping-pong balls can you fit in a Boeing (BA) 747 jet? What angle is formed between an hour hand and a minute hand on a nondigital clock when it reads 3:15?

The brainteaser - one of the rites of passage for anyone seeking entry into a banking or sales and trading analyst program -- can be a make or break moment for an aspiring banker depending on whether one screws up.

Reporters at TheStreet faced quick-answer interview questions in past lives on Wall Street, such as what is 29 x 19? Calculate the number of fire hydrants in New York City... and how many gas stations are there in America? [Hints: Show a method and some poise in solving the problem like starting with 30 x 20 to make life easier]

Stump questions sometimes even borderline on the philosophical and the absurd. A friend looking to move into a trading job at Barclays (BCS) was asked whether they'd rather be a big fish in a small pond or vice versa?

When bidding for an investment banking gig at Lehman Brothers, I was asked to value a proposal by General Electric (GE) to buy up a chain of Laundromats and detergent companies. Since GE makes millions of washing machines, the interviewer wanted to know how would I go about advising the industrial conglomerate on a plan to add verticals. [I wound up far from Lehman's M&A unit and - to my knowledge - GE's yet to unveil its big plans in the laundry biz.]

As the next batch of Goldman Sachs (GS - Get Report), Morgan Stanley (MS - Get Report), JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) analysts sit in dorm rooms preparing for the riddle that may open or close the gates to Wall Street, I submit there's a better system.

Investment banks should simply ask interviewees to put a value on Facebook (FB - Get Report).

The riddle of Facebook's valuation seems to me to be a far more productive interview question than an abstract brainteaser. Wall Street's clearly failed at putting together a cogent analysis of the company, and a new set of eyes to the problem may prove helpful.

For instance, on Wednesday, in parsing through Credit Suisse's assumption of coverage on Facebook's stock at $24 a share, the bank valued the social network's "blue sky" growth prospects in advertising and mobility at just $4.50 a share, a 60% cut from its initial estimates. Most of the price target cut came from assigning Facebook a 50% chance of being successful in its future mobile and advertising endeavors, instead of certain victory.

It seems initial analysis of "blue sky" opportunities was more like pie in the sky, so why not test newcomers to Wall Street on whether there are better ways to value Facebook? The challenge would be a good test of the skills needed in investment banks and might bring in new ideas, in a poor showing from Wall Street.

After lead underwriter Morgan Stanley and a slew of other investment banks priced Facebook's May 18 initial public offering at $38 a share, the company's subsequent near 50% stock drop and dramatic variability in published analyst estimates signal a woefully performance in valuing the billion-member plus social network.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
FB $116.73 7.20%
GS $164.50 -1.40%
MS $27.23 -1.09%
AAPL $95.03 -2.90%
GOOG $691.02 -2.10%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs