Facebook IPO: Was it a quick success or a slow failure? – Part 3

These are all the plans that the company could come up and what might realize in the future. But, what about the interim time? The company is in the stock market, not planning to do so. There are risks of high proportions in the stock market that have been beefed up by the 2008 crisis. The market is still on Achilles’ Heel and there is a new scandal or disaster that shakes up the investors’ confidence. Last year’s Euro Debt crisis, Greece bankruptcy and still to be known reason behind it. JP Morgan Chase lost $2 Billion last week and a billion more this week. All of this does not bode well for US stock markets and especially companies like Facebook who are already treading on a thin line.

The confidence in the market is low and investors are looking for solid reasons to invest. Mere loyalty or likeness to the company will not earn their trust.

There are many ways with which a company’s valuation in the future can be estimated. One of them is Discounted Cash Flow, or DCF. The formula brings forth value of the company in the next five years and its longevity afterward. This makes a lot of sense since investors are curious to invest their money in a company after being struck with 2008 fiasco.

The DCF is determined from two components. First the company’s value is calculated for the next five years. This is a bit easy and can be done with confidence. The next part called the Terminal Value (TV) is its value for the rest its life, which needs a lot of educated guess and mind boggling calculations.

Though the first part is easy, for a company like Facebook it is a little tricky. For a company that sells tangible goods or intangible services of value, against which money flows into the company, it is far less work as compared to a company that works on free services mostly.

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Posted by Usman Khalid on May 26 2012. Filed under Business, Sci-Tech. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.