Valuations (aka as Facebook)

This isn’t exactly a marketing thing, but it is interesting today to see how different companies are valued and what is the logic of it all. Makes me stratch my head a little, but it can either make sense analytically as people have very different view of forward earnings and revenues. Basically, in the old days, the idea is that P/E is a forward valuation based on past earnings, so if you have a P/E of 10, it implies typically that the future growth will be 10%. This is called a PEG ration (P/E to Growth) and that is a PEG of 1.

Today, with companies going public that have negative earnings, you either do P/S (price to sales) or you do what is called a forward P/E (that is use the estimate for when the company is profitable. So for instance in the notational company with a 10% growth in earnings, that means a one year forward P/E would be 9 because it grows 10% in the future. Similarly a five year forward PEG assuming the company grows 10% a year (1.10^5 = 1.6x) would mean a P/E is 10/1.6x or 6.2x. 

So let’s look at some companies that are going or recently have gone public

Facebook. S-1 shipped today (the reason for this piece). The valuation is $80B in the private market on $4B revenue and $1.5B operating profit so probably $1B in net income which means $80B/$1B is a P/E of 80. They would expect $6B next year and $2.5B in operating profit so that is 66% growth. That actually makes the PEG ratio pretty reasonable at 80/66 = 1.2x

Groupon. This one is hard to value as it has negative earnings