By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
Duh on you if you bought the Facebook IPO.
Double duh if you're thinking of buying Facebook stock now that it's fallen to $32 a share and lost $17.16 billion off its initial $104 billion valuation.
The company is only worth about $7.50 a share. And, no. That's not a typo. There is no missing zero or a placeholder.
That's reality. What is ludicrous is that Morgan Stanley and Facebook executives thought the company merited a $104 billion valuation at 100 times earnings.
As my good friend Barry Ritholtz pointed out recently, both Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) debuted at about 15 times earnings. Today they trade at 13.6 and 18.2 times earnings and 3.75 and 4.9 times sales respectively.
As I type, Facebook's market cap is $86.84 billion and its price to sales is ridiculously high at 21.01. I think that's way out of line.
So what should the numbers be?
Try this on for size. If we use Google's price to sales ratio of 4.9 (and I am being generous here for discussion purposes), that equals a total market cap of $20.24 billion or 76.68% lower than where it's trading today.
With 2.74 billion shares outstanding, that's equal to only $7.39-$7.50 per share.
No doubt I'll get the evil eye from the Facebook faithful and Morgan Stanley for saying this, but think about it.
Revenue is already slowing and the company does not and cannot possibly dominate the mobile markets that are becoming the preferred channel for millions of people.
Worse, startups are already cannibalizing Facebook's user base as concerns over privacy and who likes who mount.
Companies like General Motors (NYSE: GM) are deciding not to renew their advertising. This is going to hit Facebook to the tune of $10 million a year for the loss of GM alone.
More will undoubtedly head out the door for the same reason, since Facebook friends don't necessarily translate into revenue.
Corporate buyers are beginning to figure out that advertising on Facebook is simply not cost effective versus other media alternatives – gasp – including good old fashioned television and radio advertising, billboards and tradeshows.
Facebook Stock: At the Mercy of the Merely Curious
Many people think this isn't a big deal. They couldn't be more wrong.
Facebook serves up its ads while you're kibitzing about your latest trip or checking out pictures of your family's newest arrival. This is very different from how Google works, for example.
Google's adverts appear after a customer has already entered search terms and refined the results they want to see. Facebook's approach is like pissing in the wind and about as effective.
In practical terms what this means is that Google search advertisers know that those who click on their ads are already hunting. So they're willing to pay a few hundred dollars to acquire a paying customer.
Facebook advertisers, on the other hand, are at the mercy of the merely curious. That means the acquisition cost can be dramatically higher, perhaps even into the thousands of dollars.
There are very few business models and products where that kind of marketing expense is "worth" it.
Then there's the whole "like" thing.
That's badly flawed — the Internet equivalent of signing somebody's yearbook in high school.
According to the technology savvy wunderkids at Facebook, "likes" are supposed to open up a magnificent relationship between prospective customers and the brands they "like."
Maybe this worked at Harvard when you were talking about bars, people and local hangouts but I don't buy that it's going to translate into real sales. So what if you become a company's friend?
When you "like" something, you get a stream of information from the "likee" that appears on your personal Facebook wall.
Go on a "like" binge one day and suddenly you've got 20 or 30 streams of information coming in right next to pictures of your hot rod buddies or school chums.
Over time, what happens is users tend to block out these streams in yet another never ending battle to screen out visual vomit, thereby robbing companies of the very connection they crave.
Your initial "like" never goes away, but depending on the barrage of information you receive I submit that brand negativity actually builds up.
If I "like" a genre-specific museum that's just opened up in town, I don't want to see totally unrelated posts about nearby milkshake parlors issued by the museum in a pathetic attempt to keep their brand front and center on my "wall."
The real measure of any business is how it handles the "dislike" button – but Facebook doesn't offer that.
According to the marketing cognoscenti and my own personal experience, most of the companies that advertise on Facebook are far below the 3-4 interactions a week needed to prompt a customer response. That is, unless you count the four-letter words every time I get an irrelevant "story" posted to my wall.
It's no wonder to me that very "unsocial" networks are already wiping the shine from Facebook's apple.
The assumption that Facebook can maintain the 100% growth it reported Q2 2011 is no more plausible than the 45% growth it reported most recently. Google couldn't. Apple couldn't. And both of them are real businesses.
So Now What For Facebook Stock?
I think Facebook's valuation is the least of its worries. The blame game now underway is only the tip of the iceberg.
Morgan Stanley, Goldman Sachs (NYSE: GS) , Facebook and the Zuck himself are being sued over the IPO, according to a slew of papers filed in the U.S. District Court in Manhattan Wednesday morning.
At issue are material reductions in the company's revenue forecasts that were selectively disclosed to preferred investors as opposed to the investment community at large, as required by securities law.
Also at issue is the fact that a single Facebook executive may have communicated this information verbally to institutional investors but, again, not to every investor. That's a big no-no.
Talk about irony, though.
Facebook represents itself as ushering in a new era of transparency, openness and connectivity. If these allegations are true, the company could not have been more two-faced.
I've been involved in Wall Street and its IPOs for more than two decades and I have never seen something like this. It's unprecedented, especially when it comes to material revenue projection reductions during the company's pre-IPO roadshow.
So far individual investors are just getting warmed up.
Phillip Goldberg, for example, filed a complaint in Manhattan federal court against NASDAQ OMX Group, Inc. saying the exchange acted negligently in its widely publicized mishandling of the Facebook IPO.
Goldberg, who is based in Maryland, apparently wants to represent a class action lawsuit on behalf of investors who lost money because their orders were not properly handled.
The bottom line?
I'd love to buy Facebook put options. But I can't. There aren't any and estimates suggest there won't be any made available until May 29th at the earliest.
I'd also love to short Facebook stock. But I can't do that, either.
My broker tells me the stock is on the restricted list, meaning the security cannot be borrowed nor delivered in such a way to consummate the transaction.
So, I'll just sit back and watch the fireworks for a while.
Come to think of it, $7.50 a share is still rich for a company that doesn't know what it wants to be when it grows up.
I'm no advanced stock analyst, but the Facebook IPO sounded so much like the dot com boom in the late 90's…….There was so much hype about Facebook the phenomenon, and no clear picture of how Facebook the BUSINESS was actually supposed to make money.
The author is correct but some dot coms seem to fetch a ridiculous premium. The mobile situation is very bleak for Facebook. But who knows, maybe Zuckerberg could buy some other website startups that will help them make money in mobile. Also the loss of privacy and the permanent record everyone creates with each activity they do in their Facebook account. Facebook is selling this info to make more revenue but that also will scare away their customers. Our company has a Facebook page for branding purposes (we are a machinery company) but we dont intend to spend our advertising dollars with them.
Hi Keith, great analysis. Another point is that while it has some better organization and better thought out features, really how different is the utility or experience of Facebook from Friendster or MySpace? Where are those companies now? How long will it take for Google + (or something else) to be the next cool thing that hipsters, celebrities and teenagers flock to?
Respectfully, $7.50/share is still too generous. I agree with your approach, but their growth is maxed out in developed countries. Their costs are going the wrong way and they are extremely vulnerable to disruptive innovation. Revenue growth can only come from developed countries and income gap (plus internet penetration rate and many other realities) prevent this from happening. There is also the distraction of lawsuits, strange lease arrangements and other risks too numerous to list here. I calculate $5$/share. We'll soon see.
Thanks for your article. AC
Honestly, all the Hype around the Facebook IPO was insane and now we as the american public are going to pay the price. I know that there are no analysts out there that are willing to make the connection, but building up to the FB IPO consumer confidence was heading up as well as the american public's thoughts on the economy. Since the initial drop in FB and the continuing downward trend confidence in the american economy is continuing to get worse. I know it is not the only factor, but with gas prices going down (slightly), technology prices going down, and overall the housing market getting slightly better, the only real bad thing in the economy right now (in the news at least) is FB.
I think the number of users of Facebook is way inflated. Many FB'ers I know have at least two or three FB accounts. One FB'er I've heard about has 15 accounts—one for each character in the novel she has written. And those examples I'm sure are repeated, and even more egregiously, around the globe. The emperor has no clothes.
Fk Facebook , I hate them and hope they go tits up. sorry mfr's
I hope the site just disappears one day, it is completely useless.
@ Michael Cottle , myspace is still alive & well..albeit not as popular as it was in it's heyday, but… the focus over there is more on music then anything.. it suits its purpose.
All Facebook has to do to play catch up is install a big "SEARCH THE WEB" button a the top of every page, use their own algorithm, and attempt to beat Google at search by making the entire site more of a search engine. They have enough dedicated users they can try anything, everything, and eventually get it right. I personally cannot believe they haven't launch a search engine, that's a huge joke!
good article. facebook isnt worth much. just watch who gets on it and what they do while there.
I think the whole Facebook IPO was a scam to grab money, with some very big names and companies complicit in it. A Caper. A Heist.
Oceans 11? More like Oceans Fortune 500.
"I know it is not the only factor, but with gas prices going down (slightly), technology prices going down, and overall the housing market getting slightly better, the only real bad thing in the economy right now (in the news at least) is FB.'
Huh?…the latest job creation report was a DISASTER. This trumps all other variables.
Enjoyable read. Thought provoking article. Accurate, well researched, casual. A complete interrogative 'protein'.
Facebook is not for conservative, long term, sustainable growth: Message for those investors: 'You are in the wrong casino, folks. You can't be in here. This is the High Rollers club. Skip Card-Games on the the second floor, and head right to the basement. I think they have Facebook slot machines. Three 'pokes' and you win some Farmville tokens. Buh bye, now.'
During the Gold rush, (FB IPO) some of the wealthiest beneficiaries of those economic times were retail/ wholesale camp-supply outfitters and manufacturers (investment bankers, brokers). They would 'mine the miners' (investors) by appealing to their mostly, false, hopes of fame and fortune. Gold nuggets did get discovered and cashed in (gains). With lots of luck and persistence, some found a little (the "99%" of the investor world), even fewer found a lot (Zuck and friends).
Pages have been taken directly from the 90's blockbuster: "Dot.Bomb." It's get-rich-quick for the 1%. The rest have to follow sensible, conservative financial advice in order to survive. If you are able to afford to gamble, and lose, right here and now, its all a thrilling and exciting roller coaster ride investment adventure. Tech is over valued penny stock incorrectly allowed to trade in the NASDAQ by poor financial practice, cronyism, inept government policy, favoritism – all overlooked in the get-rich-quick quest for greed.
Apple will buy the company. It will get it at a barn sale price, strip it of annoying features and replace Ping which was a " hobby". Apple will announce deeper system integration with iOs at the developer's conference next week. Zuck is an oddball geek genius but ruined the company with this IPO. Apple will get rid of " likes" and monetize the FB software with apps and new hardware.
I hate to be nit-picky, but on June 4th, the facebook share price was nowhere near $32 per share. A quick check on any of the major finance sites would have told you that it was trading in the 26.50 – 27.25 range.
My guess was $10 & not a penny more but I hope this serves fair warning;
"EVERY IPO IS RIPOFF".
Great article! "Facebook … two-faced." That says it all.
Facebook over the past year, has riddled its users with unwanted changes.
Hacking is common place. You have a friend limit and its porn friendly.
Zuckerburg is so desperate that he may lower the age limiy of its users. As a user? I feel like im a little kid in zuckerburgs ant farm.
The fox is in the hen house and as my government goes ;so goes the country. Inept management is the game of the day. There is no need to reiterate. Then on the other hand we have the greedy , the crooks, and charletons.
We have low employment. Rampant welfare. All manufacturing has left the house. What we don't see and it will probably be twenty to forty years in making is the next big revolution. It is called "Sustainable Living". You have probably heard of it. What is there to complement "Sustainable Living" to make it viable? That answer is Robots. The new America the globalists are planning is a communitee where you live work and shop. The manufacturing will be robots with human caretakers. Robot s to work along side people and controllled with voice command. They can today sort parts , run welders on and on ad naussea. There is more but time is not permitting. that's all
The Newark Group "Fraud" Check it out…
http://www.middletownjournal.com/news/middletown-news/sale-of-businesses-focus-on-court-action-1387405.html
I want to know how they were ALL allowed with those ugly smirking smug smiling faces, every single one of them associated with that idioitc waste of time site to so grossly and publicily pump this moronic shite, with so much damn publicity and media for years prior to for what we now are being told is nothing but overvalued BS? What amazes me is how it appears to me that many were brainwashed, so many people, to believe that a page there or an idiotic Like on that crap is going to do anything for a business bottomline. I see no proof that anything about it has panned out but what we are now reading and seeing revealed. Who pays for this?
Who is responsible? Is is all sickening to me that people constantly appear to do this and it is always the same type of people who are the players. It has to stop.