Facebook shares took a beating yesterday after Barron’s report valued them at $15 per share (compared to the current $20.8 and the IPO valuation of $38 in May). But I suspect that even this valuation is too high. Any share today which trades at more than 20 times earnings is not sustainable. Unless there is a very clear and well grounded prospect of improved earnings, even a 20 times valuation only creates a bubble – which will burst. I use 20 times as my “rule-of-thumb” for the long-term prospects of any technology company and the point at which I can always find a better investment.
The problem with future projections of Facebook earnings is that they have yet to establish a model for mobile earnings and their current pc base for earnings is declining. Not that I have much to invest, but without a clear way of improving earnings I do not think any price of more than $8 dollars per share is worth investing in. An added worry would be the Facebook propensity to hand out large amounts of restricted stock to its employees which only dilutes the value (itself doubtful) for other shareholders.
A personal opinion I have is that as ads get more intrusive they destroy the user-experience and will become counter-productive. Already there are sites that I avoid as a reaction to the ads which are so large, take up so much band-width and slow-down my access. And when a revenue model is dependent on increasing the irritation level with users, the model is flawed. I think the never-ending increase of ad revenues by increasing the number of users while increasing the intrusiveness of the ads can not happen. In fact I suspect that some advertisers are now losing sales because their ads – which may be brilliant in themselves – are now driving visitors away from the sites they are carried on.
So Barron’s valuation of $15 which would be 35 times earnings is certainly no level for me to enter – especially when the future earnings are still so much in doubt. At half that value at around $8 per share (around 18 times earnings) I could be persuaded to enter the Facebook market – though still with the risk that they may not succeed in finding the right earnings model.
Barron’s article ends with :
Stay away from the stock. It could be heading to the mid-teens.
To that I would add “and I won’t buy until it gets well into single figures”
Facebook‘s 40% plunge from its initial-public-offering price of $38 in May has millions of investors asking a single question: Is the stock a buy? The short answer is “No.” After a recent rally, to $23 from a low of $17.55, the stock trades at high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows.
The k2p blog 