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Facebook Should Fall To $67

Summary

Looking at Snapchat, Instagram should be worth $34 billion.

Looking at Line, WhatsApp should be worth $51 billion.

This cuts $60 billion off of Hadi Orabi's valuation of Facebook.

Facebook is losing popularity among teens. Instagram is less profitable than Facebook, so it is a bad trade off for them to use Instagram over Facebook.

The coming recession, which may have already started, should impact Facebook's earnings and halt the stock's momentum over the nest 2 or 3 quarters.

As I have stated since selling Facebook (NASDAQ:FB) stock at $107 late last year, I am bearish on Facebook. I have shorted it for trades, taking profits a few times. I am currently short it now. In this article I will review some reasons to be bearish. My main reason I am bearish is because of overall economic weakness. While recessions and market corrections effect all stocks, they hurt the darlings of the market the most as firms with the highest valuations have the most to fall.

Valuation

In Seeking Alpha contributor Hadi Orabi's article he comes up with a valuation of $91 per share. The analysis is great, but I would like to add to it. He uses Snapchat's (Private:CHAT) valuation per monthly active user to come up with an estimate valuation for Instagram. He states Snapchat has 150 million monthly average users and a market cap of $25 billion which gets him to value each user at $166. Using this valuation multiplied by Instagram's 500 million monthly active users gives it an $84 billion valuation. However, the most updated information shows Snapchat has 235 million users. Using this metric cuts the value per monthly active user down from $166 to $106. This gives Instagram a $53 billion valuation.

There are two more things to consider. The first is that Snapchat is more expensive than past IPOs in terms of its revenue multiple. As you can see below, Snapchat's 25X forward revenue multiple is much higher than Facebook's 19.4X and Twitter's (NYSE:TWTR) 13.0X. If you valued Snapchat at the average of those two IPOs instead of what it is currently at, it would be valued at $16.2 billion. Using that number to value Instagram lowers its valuation to $34 billion.

Valuing Instagram in relation to Snapchat is also aggressive because each Snapchat user spends a couple more minutes than each Instagram user per day. The latest information I can find is shown below from August. The graph was meant to show how Instagram Stories hasn't caused users to spend less time on Snapchat and more on Instagram, but serves to show Snapchat users could be worth more if they spend more time on the platform. Snapchat is still in the early innings of its monetization efforts, but it has faster user growth than Instagram.

I would also like to improve Hadi Orabi's valuation of WhatsApp. He comes up with a valuation of $61 billion by simply valuing its users at the same rate as when the acquisition took place. He then uses the most recent estimate for the number of monthly active users on the app which is about 1.1 billion. Instead of doing that, I will use Line's valuation per user to come up with a valuation for Whatsapp. Line has 220 million monthly active users and a market cap of $10.28 billion...


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