Facebook launched its initial public offering a few weeks ago and a lot of investors gobbled up shares of the stock. Facebook had a lot of things going in its favor. The company has name recognition. Facebook is incredible well known with over 600 million people having accounts. Social media is one of the hottest niches in the technology market place and investors are lining up to throw cash at the sector. Combine all of the factors and you can see why Facebook’s stock price hit $45 a share.
The bloom quickly came off of the rose and Facebook has seen its stock price tumble dramatically. Shares of Facebook have plummeted 55% as investors have been burned by the pricey IPO. Now Facebook is trading slightly above $20 per share. The stock dropped because a number of larger firms dumped their shares on the open market burning smaller investors. There was also some concern over the short term revenue and profit growth.
While growth investors may hate to see a stock like Facebook plummet. As a value investor, I love it when a quality company has a major price dip. That is a buying opportunity to me.
I love Facebook as a social media website but the stock was clearly overpriced.
Facebook was trading at 9 times book value, 85 times earnings, and 3 times the projected growth rate. The future P/E ratio was near 70. There was no reason that Facebook deserved such a lofty valuation except for hype. While I did not like Facebook at its IPO price, I do think that the stock is worth a shot in this price range. I would buy Facebook in the $18-$20 range as much of the risk has disappeared from the investment.
The P/E ratio is still high but Facebook’s P/E ratio is much closer to the projected growth rate of the company. Facebook has a massive $10 billion dollar cash hoard and virtually no debt. The company is still in the early stages of capitalizing on its online advertising. Facebook’s $1.8 billion in free cash flow should continue to rise long term. The 3.5 price to book value is right in line with industry competitors.