The Facebook (FB) IPO was hailed as one of the greatest investment
opportunities in stock market history. But in the end, it can be summed
up with just one word...
ANTI-CLIMACTIC!
Investors had been anticipating for months that Facebook would
soar on the IPO. With nearly one billion users worldwide, Facebook is
the 900 pound gorilla in the hugely popular social media business. And
most experts are projecting strong growth ahead for the company.
Nevertheless, the heavily hyped IPO fell flat on its, well... face.
The social media giant ended its first day of trading just 23 cents
above the IPO price. That translates to an opening day profit of less
than 1%!
Clearly, not the huge first day gain most investors were expecting.
What's more, the stock's plunging further in early morning trade. As I
write, FB is down more than 12% at just over $33 per share. And it's
trading at a 13% discount to the IPO price.
Now, I must admit I'm not all that surprised by Facebook's cool market
reception.
You may recall I was one of the few market analysts who predicted
Facebook's IPO would fail to live up to the hype. And in my article,
Three Reasons Why I'm Not Buying The Facebook IPO, I urged my readers to
avoid buying FB on the IPO.
However, with the share price dropping, many investors are starting to
wonder if FB is now a good buy.
The short answer... Not yet!
Even at $33 per share, Facebook is still way overvalued in my humble
opinion. At that price, the stock is trading at a lofty 79x trailing
twelve months' earnings.
Just how high is this multiple?
Try this on for size. FB's PE ratio is more than 4x greater than
Google's (GOOG). And it's over 6x larger than
Apple's (AAPL).
We haven't seen a valuation this high in the stratosphere since the dot
com bubble of the late 1990s.
And given the company's recent struggles, it's hard to justify why FB
deserves a higher PE than GOOG or AAPL.
Just last month, Facebook reported a weaker than expected first
quarter. Both revenue and earnings declined from the fourth quarter of
2012. And
to make matters worse, the drop was due to a downturn in the
company's
core business... internet advertising.
This is a big concern going forward.
In addition, the company now faces a potentially huge legal battle over
the privacy rights of its users.
Shortly after the IPO, the company was sued by a group of current
Facebook users. The suit claims Facebook invaded users' privacy by
tracking their internet usage.
Plaintiffs are seeking money damages to the tune of $15 billion.
This lawsuit is certain to be a major distraction for a management team
just now making the difficult transition from private to public company.
And if Facebook loses the suit, they may have to pay a fortune in money
damages.
In fact, Facebook could end up paying out nearly every penny raised in
the IPO.
Bottom line...
Even with the recent drop in price, Facebook shares are still highly
overvalued. Investors would be well served to let these shares fall to a
more reasonable level before hitting the buy button.
Profitably Yours,
Robert Morris
