What Is Facebook Really Worth?

Since making their debut on the public market less than two weeks ago, shares of Facebook (NAS: FB) have lost 29% of their value. Once thought to be a lock for $100 billion valuations or more, the social network's market cap has dwindled to just $59 billion. The stock is trading at $27 per share as I'm writing this -- down 4% for the day. Early IPO buyers can't be too happy about their investments right now.

So where will the slide stop? Asked another way, what is Facebook actually worth?

Asking for advice
A straw poll on Wall Street would tell you that the company is undervalued. The average analyst's price target on Facebook stands at $41 per share. Even the lowest available estimate points to a $30 price tag, some 11% above current prices.

But the market doesn't live and die by analyst estimates, or else SanDisk (NAS: SNDK) shares would be worth 35% more and Google (NAS: GOOG) would fetch $747 per share for a quick 28% boost. But SanDisk always fights the specter of overwhelming competition in the flash-based storage market and Google has been ridiculously cheap for years. So the rainmakers obviously don't get to set market prices on a whim.

Doing your own math
How about a discounted cash flow analysis, then? Facebook does generate positive cash flow, so this standard tool in any serious long-term investor's belt could work.

With Facebook having $639 million of free cash flow in the trailing-12-month period, I'm using the same 12% discount rate I'd apply to a stock like Google and the 36% annual growth rate those optimistic analysts are suggesting for the next five years. We can argue all day over how reasonable these assumptions are (and I'll throw a few Molotov cocktails later in this article), but even so, the analysis and a couple of other assumptions on my part point to a $19 intrinsic value.

It'd take a 30% plunge to get the stock in line with this traditional valuation estimate. Looking at existing price targets instead of growth estimates, you have to assume something like 45% annual cash flow growth and a still-weighty 22.5% growth in years five to 10 to get to today's prices and 50% to align with analyst targets.

Adjusting your rose-colored glasses
I happen to believe that Facebook won't hit anything close to those growth rates. The company has struggled to squeeze revenue out of its 900 million users, and will probably see the value per eyeball sink even further over the next few years.

Why? Because mobile traffic is getting ever more important to Facebook -- and that crowd is even tougher to monetize than the desktop audience. Just ask digital music maven Pandora Media (NYS: P) . Pandora complains that mobile ad rates can't keep up with the more traditional browser-based version, and that's from a company that can get away with inserting big banners and 30-second video ads into the mobile experience. Facebook doesn't have that luxury.

On top of that, I'm not at all sure that Facebook can hold on to the current user base for very long, to say nothing of growing it. In a brand-new Visual Networking Index report, networking giant Cisco Systems (NAS: CSCO) predicts that we'll have 3.4 billion Internet users globally in 2016, about double today's figure. Doing that math, you'll see that about 50% of the addressable market already owns Facebook accounts today. If that's not supersaturation, I don't know what is. And then the next big thing comes along, and Facebook becomes the next MySpace. That's the end of the growth story and the start of some real investor pain.

The final verdict
So with all these issues in mind, what would I pay for a share of Facebook today? The truth is, I wouldn't. Facebook is a sell at almost any price.

Whether the company really is worth $50 billion or $100 billion right this second, I'm pretty sure the value will erode over the years. The IPO was masterfully timed, kind of like selling your mansion in 2007. Facebook will need to reinvent itself very quickly to save investors from a ton of heartache, and I wouldn't bet that it can.

That's why I have a big, red "underperform" CAPScall on Facebook right now. You can do much better than gambling on Facebook in this market. The Fool's top analysts have created a new report, "Forget Facebook -- Here's the Tech IPO You Should Be Buying," that details a much better social media stock that is leaving Facebook's growth rates in the dust. The report won't be available forever, so click here to get access today -- it's totally free.

At the time thisarticle was published Fool contributorAnders Bylundowns shares in Google but holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+.The Motley Fool owns shares of Facebook, Google, and Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Google. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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