Mad Money entertainer and financial guru Jim Cramer loves growth, of course. So he has loved the paths of what he calls the FANG stocks: Facebook, Amazon, Netflix, and Google. But just because they’re the big category leaders doesn’t mean Cramer loves everything about these household names. Cramer has said buy, but not “because they represent great value.” However, Facebook is an exception: Cramer does a succinct job of saying why Facebook is actually undervalued.
Cramer makes the case that Facebook is $26 below fair value. Facebook expects to earn $3 in 2016 and it’s already growing at a 30% clip — way above the typical S&P 500 company. (The S&P, Cramer laments, is priced at about 17x earnings.) Facebook is cheap at twice that multiple, Cramer contends, which would value the stock at $102 — around $8 more than its current market value. He goes on to speculate that Facebook could/should (Cramer says “can”) earn $4 in 2017; at the number Cramer thinks Facebook’s current share price is “$26 below fair value.” Here’s Cramer in 2paragraphs:
“Right now Facebook is expected to earn around $3 for 2016. Given that the company is growing in excess of 30%, well above the average S&P stock, the $94 price tag is not outrageous. If the S&P 500 sells at about 17x earnings — gee, I wish that were cheaper — then you can see it selling at about twice the multiple without it being expensive. That means right now it is $8 below where it is already inexpensive.
“But take it a step further. I think the company can earn $4 in 2017. That makes it at 27x earnings. I believe it should sell closer to 30x that $4 number. Now you have a stock that is $26 below fair value. That makes the stock of Facebook a buy.”
