Facebook - It has begun...

Zacks

The Facebook craze culminated this morning as shares began trading on the New York Stock exchange. Hate it or love it, the IPO priced at the very top of its range at $38 a share, valuing the company at over 104 billion dollars on annual income of 1 billion, which puts subscribers to the IPO at a 104 price to earnings (P/E) buy-in.

While buying a stock that is selling for over 100 times the profit they make in a year seems steep, many of you didn’t get to buy FB at $38. Even with all the hype, perhaps investors are wise to the flaws in the FB valuations - Right now the stock is trading at $41, up only $3 or about 8%, a far cry from the $100 target some were setting for the first day of trade.

Even at $41, valuations are high at roughly 110 times earnings.

It’s the same as buying a lemonade stand that made $1000 a year for $110,000. If income stayed the same, it would take you 110 years to get your original investment back.

Given the fact that the S&P 500 is currently trading at about 13 times earnings and investors are selling with fervor, then why in the heck would anyone buy a company 847% more than the average price of a stock in the market? The simple answer is excitement and more importantly the hope and prospects for growth; both being the main drivers for a stock like FB or any hot growth stock that seems pricey. To attract buyers, high priced companies need to prove that they can grow profits in an extraordinary way.

LinkedIn Love

LinkedIn (LNKD) was trading at almost 1000 times earnings when it came public and still is selling for more than 300 times earnings; their stock is up enormously in the past 5 months. Of course the stock dropped 50% just after the IPO due of doubts about their growth, it came roaring back once the earnings report affirmed their expected growth.

The reason why folks paid so much for LNKD was the SPEED at which it said it could grow earnings. A problem arises if they miss an earnings report, because that speed (or trajectory) is then lowered, often resulting in a catastrophic selloff, which has happened a couple times in LNKD, which I consider the FB for professionals and perhaps the best gauge for the behavior of FB in the marketplace.

The bigger the P/E, the bigger the expectations and subsequent selloff if they disappoint.

Is Facebook Really that Great?

Getting back to FB, I personally don’t see super stellar growth within the company. Ad revenue actually dropped between Q42011 to Q12012. Coincidentally, GM announced that they are pulling all their ads from FB moving forward noting the lack of return on capital. If last quarter Ad revenue slowed and this quarter will see the departure of GM and perhaps more clients, then where does FB’s big growth come from?

Sure they are adding users still, but being that the bulk of their revenue is derived from their ads (which I have never clicked on) and those ads are in question, do they really deserve such a rich valuation?

Just 2 weeks ago an advertizing buyer for American Apparel said that he too has pulled all ads from FB because “They just don’t work.” Searching the net for blogs and articles from reputable media outlets has led me to opinions and facts that support this same thesis.

By the way, Facebook has been unable to monetize its mobile users to date and frankly I don’t know how they are going to do it. The basic application is slow and crowded as is and obviously free if you start sticking banners all over it you’re going to deter users from even wanting to log on and for those who just post photos, videos and status updates; they won’t even see the ads.

So again, I fail to see where this windfall of growth is coming from…

Did I mention that it took almost 2 years for Facebook to double their ad revenue from Q22010? Apple doubled its earnings in a year. If Apple had just ¼ of Facebook’s current valuation, their stock would be trading way over $1200...

Just a thought. I think Apple is not only a bargain at its current levels, but offers better prospects for growth than the almighty Facebook and its ruler, the ever-cocky Mark Zuckerberg…

So I am curious if anyone out there completely disagrees with me and is buying Facebook at these levels (and why)?

I am also wondering where everyone thinks Facebook will be trading 6 months from now?

(I thought I'd take my colleague Brian's challenge a bit further)

Read the analyst report on FB

Read the analyst report on LNKD

Read the analyst report on AAPL

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