Aswath Damodaran on Facebook’s Valuation

Facebook posts its biggest monthly gain since its IPO in November, Aswath Damodaran, NYU Finance, who teaches value investing talks about the company, which he thought was too highly valued at the time of the IPO. The video and computer generated transcript is below:

H/T Value Investing World

(Text posted as transcribed -ed.)

is the new found love justified or is your best bet to stay away? finance professor at new york university, he’s one of the most respected experts, as well on stocks and valuations joins us live from manhattan. professor, good to see you again.

glad to be here.

nice to have you back. considering what facebook has done lately. what do you make of it from where you sit?

when you look at a stock like facebook, it still remains a momentum stock. so i could tell you all kinds of rational rah stories about why the price has risen and the lockup ending and the fairly good earnings report. but i think the reality is that it’s a good stock now so everybody is piling on. as we have seen in the nine months we have tracked the stock, it could very quickly run in the opposite direction in four weeks. so i take my gains with a grain of salt, which it is it could be here today gone tomorrow.

what is facebook worth? what’s fair value for a stock at $28 and change?

i value facebook four times in the last nine months, starting the day before the ipo. the range i’ve had is a pretty tight one, between $24 and $27. and what’s happened in the last few months, actually, has not dissuaded me from that basic valuation. there has been no breakout good news. there’s been no breakout bad news. i think if you look at the company now, it’s very much the same company we were arguing about in may of this year. so from my perspective, i think 28 is fairly decently priced. i think it’s a fairly priced stock now. i would be buying now.

you would. do you own it yourself?

i owned it, bought it and in that moment of weakness right after the first earnings report when i committed to buying it at $18 it is . i’m glad i’ve made money. but i think it’s more due to luck than anything else.

what changes the professor’s mind?

i think it’s going to be incremental. each of these earnings reports, you’re building a fairly long-term structure. i’m not looking for something spectacular in an earnings report. each earnings report, where they move in the right direction, is a good step. so i’m looking for incremental good news. not — so i don’t want them to go out and do something rash, buy another company, buy growth at a high price. so they keep doing what they’ve been doing for the past few months, i think that’s good news for investors.

you would admit, though, the mobile story seems to have turned the page, at least a couple of pages.

maybe they haven’t come to the end of the book yet on how all that is going to shake out. but it seems to be reading better. let’s put it this way. if the mobile story had collapsed that would be breakout bad news because that’s where the future of facebook is. so the fact there is no breakout bad news is in a perverse way good news. let’s ask about this parade of special dividends we have seen. it seems like every company — between now and the end of the year, if they haven’t done it already they’re going to do it because of the cliff. how should investors be reading that in terms of how it values a company that’s paying out a special div? i don’t mean to sound like i’m hedging, but it can be good news, bad news and neutral news. here’s how you can tell the difference. a company that’s actually using cash on hand to pay these special dividends, the special dividends are pretty much neutral news. your stock price will go down by roughly the amount of the dividend. the company that’s borrowing money to pay these special dividends, and quite a few are, the net effec be positive, if the company doesn’t have very much debt now. but some companies, i think, are actually pushing the envelope, borrowing more than they should. and those companies can — even though the special dividend looks good now, can get themselves into trouble in the future. so investors would be doing themselves a disservice making a mistake to try and bet on which company is going to be next and buying it ahead of that, or simply buying it once they announce a dividend. because i think you’ve probably noticed yourself that most of the companies that have announced a special dividend, the stock ends up going up. yeah. and i think in a sense, to the extent that special dividends — messages about the company, i think that message can be good news or bad news. so i think it’s got to be company by company. but i wouldn’t go around chasing special dividend stocks right now. i think it’s a dangerous game.

all right. great to have you.

thanks so much for coming on again. love your insights. i’m sure our viewers do, as well.