Facebook Stumbles On IPO… Is It A Buy?

| May 21, 2012

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!

There’s really no other way to describe it. 

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

Tags: , , , , ,

Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

Comments are closed.