I Was Wrong About Facebook Inc (FB)’s Narrative Remaining Unchanged: Aswath Damodaran

It’s rare for someone related to academia in finance or economics to come out and accept their mistake in public, but as Aswath Damodran shows us, it’s only rare not impossible. The much loved valuation expert and finance professor from Stern School of Business, NYU recently stated on his blog that he was wrong with not changing his narrative regarding Facebook Inc (NASDAQ:FB) in August 2013, and selling the stock, which he had bought when it was below $20 levels, at $45.

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Damodran starts his analysis right from the beginning when Facebook Inc (NASDAQ:FB) had just gone public. He had argued then that Facebook Inc (NASDAQ:FB)’s stock was overpriced for the IPO and even though the decline in Facebook Inc (NASDAQ:FB)’s stock price vindicated him later, he now considers that the reason for the decline was Facebook Inc (NASDAQ:FB)’s investment banker not setting a narrative for the company, instead of the over-valuation theory that he suggested.

Damodran then proceeds to remind Facebook Inc (NASDAQ:FB)’s last nine quarters’ earnings figures that when the company announced its first quarterly earnings after its ‘botched’ public offering, the stock plummeted by 25% in a few days. It was then that he found the company was undervalued and bought the stock when it traded below $20. Damodran mentions being ‘lucky’ for catching  Facebook Inc (NASDAQ:FB)’s stock at its lowest point as it doubled over the course of next one year.

As the professor from NYU states on his blog, he again visited Facebook Inc (NASDAQ:FB)’s valuation in August 2013 after the company’s earnings report, and as he mentions later on, made the mistake of not changing his narrative and selling the stock at $45. Facebook Inc (NASDAQ:FB) moved on to surprise analysts quarter after quarter since then by growing its already immense user base, increasing advertising revenues and improving its capital efficiency, something that Damodran significantly highlights.

Finally, he gives us the reason for him being wrong with his narrative for Facebook Inc (NASDAQ:FB). The first one in the list is him undermining Facebook Inc (NASDAQ:FB)’s continuous growth in the mobile market, which he now feels is so staggering that “there is now a very real possibility that Facebook will supplant Google as the online advertising king”. The second reason is that he didn’t expect Facebook Inc (NASDAQ:FB) to continue growing its user base the way it did. Damodaran also updates his valuation on Facebook Inc (NASDAQ:FB), giving the company’s stock a current value per share of $63 and saying that he doesn’t see the current price of $72 per share a bargain.

Disclosure: None

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