Should You Buy Facebook?

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.

3 Responses to “Should You Buy Facebook?”

  1. avatar Money Beagle says:

    When they announced that they were both increasing the IPO price AND the float (number of shares), I knew that they were leaving no money on the table for investors. Good for them as they maximized the cash they were able to raise, but the PR ever since has definitely taken a toll.

    It will be interesting to see how it goes. They can definitely expand advertising, but I think there’s limited upside there, simply because people dislike advertising and at a certain point will reduce (or eliminate) their use of Facebook or find ways to filter the ads, thus reducing their effectiveness (and value).

    I see a flat ride for quite a while.

  2. It will certainly be interesting to see how it goes… I’ve certainly been writing a lot about Facebook and finally bought some shares 10 days ago or so, which I intend to hold for a long time. I just think most people are getting it wrong.. I see so many other revenue options so just looking at growth in users and advertising is missing a huge part of the picture in my opinion.. time will tell though:)

  3. avatar Burnt Toast says:

    I feel that Facebook was doomed from the start. When you have multiple employees with numerous amounts of shares locked up, the first thing that they’re going to want to do is cash out to maximize their profits. Even Mark Zuckerberg himself had stated in his initial report to the shareholders that one of the main things to watch out for in the future would be “himself.” If that doesn’t get the message across to people to be wary of FB’s potential in the future, I wouldn’t know what will. Management didn’t sound like it was on board, and I would’ve taken that as a big red flag.

    Next we would have to take a look at Facebook’s earning potential. They rely heavily on advertising and as Money Beagle stated, the use of massive advertising would cause people to find new ways to filter the advertisements. That in itself would require them to potentially find new ways of generating revenue, such as charging for games played on FB, or begin charging people to use the basic instant messenger. The downside would be that what people have enjoyed before FB went public, would begin to deteriorate when they try charging for their services.

    Another issue would be actual users of Facebook. I know that the company posts that they have at least 850 million+ users, but how many of those accounts are actually valid? How many times have you come across someone you know who has multiple profiles?

    I feel that there isn’t enough meat and potatoes to justify why anyone should buy into Facebook. Facebook is currently trading at a P/E of 111. Benjamin Graham would be rolling over in his grave if his prodigy child Warren Buffet were to even think about buying into them now.

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