FB
May 18, 2012 – 5:06 pm
It’s Facebook Friday. The initial public offering of the stock has reached manic levels as everyone tries to get in on the IPO. The hype about it seems to ignore the facts. Sure it is exciting and certainly the stock market could use a little positive press, a nice change from the ugly game of chicken that Greece is playing with the rest of the EU, but let’s look at the numbers Facebook produces.
First, an IPO price of $38 puts the value of the company at a little over $100 billion. A very large company by any standard. However, a company is worth what it earns. There is a relationship between earnings, the growth of earnings and the ultimate value of every public company. Facebook earned in 2011 one billion dollars. That means that their P/E is 100 at the IPO price. That is a steep price to pay when the market P/E is 15. Maybe it’s worth it if growth in earnings doubles over the next year. The problem with that is that sales revenue shrank 6% last quarter and it certainly does not give me any warm fuzzy feelings that earlier this week General Motors pulled their advertisement from Facebook saying it is not working.
Facebook is a great company but they still have to turn those millions upon millions of users into revenue generates for the company. and that revenue has to grow just as fast as new users utilize their system and that, at least so far, is not happening.
I am sure it will be a successful IPO launch and the stock price will rise but the facts tell me it is not going to be easy to maintain that lofty value.
Good Trading
Steve Peasley
