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

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.

New attempts at valuing Facebook's monetization opportunity signal that it amounts to chump change. In its research, Credit Suisse makes a point of disclosing that the bank is in shareholder class-action lawsuits related to Facebook's IPO and says it isn't analyzing the merit of such lawsuits in its analysis

On Wednesday, Bloomberg reported that Facebook argued with the Securities and Exchange Commission to keep its mobile risks out of the IPO prospectus. Eventually, after a drawn-out fight between the social network, its lawyers and the SEC, the risks were included in the prospectus, the article noted.

While recent analyst attempts to value Facebook signal the challenges present in the company's IPO, there's reason to question whether the company was misleading in its disclosure of risks to mobile strategy.

Going back to the original filing on Feb. 1, mobile is listed as a key risk factor. "Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results," the filing said.

Facebook's mobile future has been a major concern for the company, as more users access the site through smartphones and tablets, where ad revenue is less lucrative than on its website. Facebook recently announced it had surpassed 1 billion users, with more than 600 million of them using mobile devices. That's up from 543 million at the end of the company's second-quarter earnings.

Facebook's mobile future has already faced stiff skepticism, as both Wall Street and the media have questioned the company's long-term ability to generate profits from its mobile initiatives, amid a near 50% post-IPO stock drop. Some speculated that the company's recent acquisition of Instagram, a photo-sharing app used primarily on mobile devices, is a way to generate revenue.

BTIG analyst Rich Greenfield recently downgraded the shares to "sell" with a $16 price target, on concerns over its mobile future. "We are making our second FB earnings reduction since the company went public to account for a more rapid shift to mobile, as well as decreased payment revenue given the shortfall created by Zynga," Greenfield wrote in his note.

CEO Mark Zuckerberg recently addressed questions about mobile at a tech conference, saying "how well we do with mobile is how we'll be judged." He noted that seven months ago, Facebook didn't run a single ad on mobile. "People are underestimating how fundamentally good mobile is for us."

Interested in more on Facebook? See TheStreet Ratings' report card for this stock.

-- Written by Antoine Gara and Chris Ciaccia in New York

If you liked this article you might like

Using Twitter to Trade Stocks

Using Twitter to Trade Stocks

Buy Stocks That Are Right for You: Cramer's 'Mad Money' Recap (Friday 2/16/18)

Buy Stocks That Are Right for You: Cramer's 'Mad Money' Recap (Friday 2/16/18)

How Jim Cramer Knew to Sell Just Before The Dow Jones Industrial Average Tanked

How Jim Cramer Knew to Sell Just Before The Dow Jones Industrial Average Tanked

General Electric Is One Mega-Cap Stock You Must Still Avoid

General Electric Is One Mega-Cap Stock You Must Still Avoid

Stock Markets Are Booming Again but Panties Prices Continue to Plunge

Stock Markets Are Booming Again but Panties Prices Continue to Plunge