Facebook Shares Too Expensive

Following the purchase of Whatsapp analysts have downgraded Facebook to a one star stock meaning it is currently trading at significantly more than its fair book value

Rick Summer, CFA, CPA 6 March, 2014 | 9:11AM
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In a bold and aggressive move, Facebook (FB) has agreed to purchase WhatsApp, a global messaging company, for approximately $19 billion, including $4 billion in cash, 184 million shares of Facebook stock, and 46 million restricted stock units for employees of WhatsApp. Based on our $45 fair value estimate, the size of the deal is roughly 13% of Facebook's enterprise value. The deal is expected to close in late 2014.

We are sticking with our fair value estimate for Facebook, and we maintain our wide economic moat rating. We still consider Facebook's shares to be overvalued, and we recommend investors to wait for a meaningful pullback in the stock price before allocating new capital to this name.

The deal's financial merits may eventually materialize. However, in our view, the potential synergies of this acquisition are at best opaque and potentially non-existent. Facebook management has highlighted its intent to maintain WhatsApp as an independent product, with a nod to its Instagram acquisition. Furthermore, we think Facebook is unlikely to introduce advertising into WhatsApp messages, implying no potential increase in its ad revenue or monetization capabilities.

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About Author

Rick Summer, CFA, CPA  Rick Summer, CFA, CPA, is a senior stock analyst with Morningstar.

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