Is Facebook worth the bet? Doubts amid the frenzy

May 16, 2012 by Paul Handley

Everyone knows it is a giant of the Internet that will make money for a long while. But is Facebook worth investing in at its elevated initial public offering price?

Analysts have some doubts: the company has huge value, and could be very worthwhile over the long term. But there might be cheaper opportunities elsewhere on the market.

On the other hand, demand for Facebook shares is so strong that, fundamental valuations aside, an investor might score big in any case.

For one, there is last year's big IPO, LinkedIn. Those who risked buying its shares at the seemingly expensive $45 issue price would have more than doubled their money by now.

Facebook is confident of the demand. On Tuesday pushed up the price of its IPO, expected to take place Friday, to $34-$38 a share, from the previously proposed $28-$35 range.

That is fairly high, by fundamental valuations, analysts say. At the current pace of growth, the company's price-earnings ratio would be more than 60 times this year's projected earnings and 40 times next year's.

That compares with an current average market p/e ratio of 19.7 times, and rival online ad giant Google's 18.5 times.

Moreover, the company's report showed slowing ad growth, rising costs, and the company was struggling to find ways to make money on customers who were using their smartphones more and more for their Facebook postings.

"It's really highly likely the company is overvalued... our fair value is $32," said Rick Summer of Morningstar.

The issue price has been driven by the sheer frenzy of demand, he said. "This is the one that people feel they have to get a piece of."

"Sometimes the expectations get ahead of the fundamentals," said the more bearish Trip Chowdhry of Global Equities Research.

"Revenue per user... is very low (and) Facebook doesn't have a strong mobile story," he said.

The issue, said Chowdhry, is whether one believes the huge long-term promise that Facebook will keep a lock on users and their personal data that advertisers so sorely want, to keep it shoulder to shoulder with better-established Google in the online ads business.

"Is it a fad or is it a trend?" Chowdhry asked. "The industry is not defined, the business model is not defined, the user behavior is not fixed."

Chowdhry says the company's financial performance might not justify the price for several years. Revenues will grow quickly from online ads, but not earnings.

Facebook has to keep making huge investments -- in staff, technology, facilities, and strategic moves like the $1 billion takeover of photo-sharing service Instagram.

Yet longer term analysts are mostly bullish. They say Facebook's potential lies in its potential to increase its revenues very fast.

"If Facebook can actually have that reach into a billion users across the globe, that becomes an extremely valuable advertising platform," said Summer.

"Over the longer term we see Internet ad space is largely a two-headed monster": Google and Facebook.

The question for small investors, though, is whether Facebook's shares will perform. Against the example of LinkedIn are Zynga and Groupon, tech-industry IPOs of the past year which both are now trading well below their issue .

Virginie Lazes of Bryan Garnier & Co. says that even if the valuation is a little high, she expects the Facebook price will hold up.

Over one year, she said, "I think it could go up 5-10 percent. That is already good" for a company so large.

Given the choice, however, Summer said that Google looks like a better bet.

"The valuation differential is way too much" between and much younger Facebook.

Google's share price was at $611 Tuesday, and Morningstar has put a valuation on it of $780.

Explore further: Alibaba surges in Wall Street debut (Update)

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AWaB
not rated yet May 16, 2012
"Is it a fad or is it a trend?" Chowdhry asked. "The industry is not defined, the business model is not defined, the user behavior is not fixed."

The industry is defined, social networking. The business model is, provide services (games in Facebooks case) and advertisements, and user behavior is fixed because we see that people will drop Myspace for Facebook when the service isn't as good.

We also know how bubbles occur: when everyone and their brother jumps on and when there is no one left, blam! Facebook has nearly 1 billion users, I'd say they're running out of market pretty fast.

If you purchase this stock, don't plan on holding it!
Origin
not rated yet May 16, 2012
NewScientist article about the same subject Facebook shares are overvalued, say financial analysts
kaasinees
3 / 5 (2) May 16, 2012
Investing in non-physical stocks or non-labor stocks is moronic and risky.
Its called a bubble and investing on speculation.
Shakescene21
5 / 5 (1) May 16, 2012
You've seen the Movie -- Now Buy the Stock!!!
AWaB
not rated yet May 19, 2012
Investing in non-physical stocks or non-labor stocks is moronic and risky.
Its called a bubble and investing on speculation.


speculation = gambling

Just go to Vegas. You'll have more fun!