Quote:
Originally Posted by Nightfyre
I doubt that Facebook can maintain bottom line growth of 23% for ten years. At some point they hit one of any number of growth obstacles, such as market saturation, regulatory risk, and social media competition or even obsolescence. Furthermore, assuming they will maintain a PE of 40 is not remotely conservative from where I am sitting. The higher PE is indicative that the market is pricing the stock for significant future growth. Anything that impinges on their growth will inevitably decrease the multiplier.
The problem with your valuation methodology is that it depends on projecting long term earnings growth and extrapolating that projection by multiple factors to take a guess at a future value. If your assumption is only a little off, your whole value takes a hit.
You can conduct sensitivity testing on your model by shocking the underlying assumption, which would be better than picking an arbitrary percentage at the end. What happens if bottom line growth is only 12% instead of 23%?
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Yeah, that's why I would typically want to see 10 years of consistent growth history, so the projections could be more predictable. In this case you're right...probably too many assumptions involved, even with the margin of safety in place.
Interesting feedback. Thanks.