Why Facebook (NASDAQ: FB) Shares Are Radioactive - Mike Swanson (05/23/12)
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What we are seeing in Facebook is one of the craziest things I've ever seen in the stock market, and I've seen a lot of crazy things over the years. Right now the company is engulfed in controversy and people are filing lawsuits only days after it went public and started to trade on the Nasdaq last Friday.
Right now there is a lot of anger and hand ringing over why the stock has dropped. It is almost as if people think the stock was supposed to go up and since it didn't someone has to blame. Many people bought the IPO, but it seems that very few people want to admit to themselves the truth - which is that they bought shares of Facebook at a stupid price and that is why there are losing money - and instead simply want to blame others for their mistakes. People who hire lawyers because they bought a stock and lost money are usually losers in life. When you have a setback you need to move on and find the next big thing that can make you money and not wallow in misery.
Where is Facebook going now?
Before I get to that though just remember what it was like a week ago when Facebook started to trade and the media acted as cheerleaders for the stock.
It is funny how the very reporters that were acting giddy over Facebook are now slamming the company.
It is funny how little rational analysis they provided their viewers.
There are a couple things I want to add to the Facebook conversation to try to set things straight.
1)First of all the stock was priced by its underwriter Morgan Stanley and Facebook management, which ultimately is this Zuckerberg character, at an insane valuation. Even though the stock has since dropped it is still trading at a nosebleed valuation. Facebook has a P/E right now of 73.90 and a forward P/E of 48.48. In comparison Google has a P/E of 18.47 and a forward P/E of 12. So to purchase an investment in Facebook's earnings requires you to pay four times what you would for Google.
Now that would be ok if Facebook's earnings were set to just grow exponentially in the next few years. But they aren't. In fact in this last quarter Facebook's earnings were down 12% from the same quarter last year.
Facebook has a PEG ratio of 1.66. Stocks are considered to be fully valued when PEG ratios are around one and I look to buy stocks with PEG ratios of 0.50 or even lower to insure that I am getting a good bargain on a stock when I plan to make a serious investment. Google's PEG ratio is .78. I bring that up to show you not that I think you should go buy Google, but to demonstrate to you how sky high Facebook's valuation is even now.
Based on fundamentals Facebook shares are fully valued at 18 a share.
That is my price target for Facebook.
2)Now when companies do an IPO normally it is hard to get shares. Floats are small. The people running the company don't want to dilute themselves or their other shareholders too much so they don't try to sell stock to everyone in the world. They want there to be people who couldn't get shares or just got a few who will be hungry to buy once the stock starts to trade on the exchange. That way there will be healthy trading demand for the stock and it will go up.
With Facebook they sold millions of shares - as many as they could apparently- before it started trading at insane valuation levels. I logged into my mom's Etrade account a few days before the IPO day and I could have bought her shares if I had wanted to. And she has a small account that doesn't engage in much trading. She isn't like an important customer for Etrade. I didn't buy shares.
So anyone who wanted to was pretty much already in Facebook before it started to trade on Friday while a lot of insiders were getting ready to sell.
Zuckerberg sold over a billion dollars worth of his stock during the IPO. He knew it was a great place to dump and so he did. But who was there to buy once it started to trade? He ran out of suckers so the stock dropped.
You had a situation doomed for disaster.
3)The very fact that the Facebook company sold this many shares to the public at stupid prices means that they were in effect taking advantage of the public and fleecing them. They were not treating the people who were investing in the company as valued partners, but as people to be screwed over. Well if you have seen the movie about Facebook or read about the history of the company you'll know that in fact that is how it started. It's early history consisted of lawsuits between Zuckerberg and people he founded the company with and others that thought he ripped them off.
If you start a business and get people to invest in it you want them to make money. That way they will want to get involved with you in future deals and so will others. Business is about your reputation. It's also human nature to want people who invest in you to do well whether they are investing simply time or emotional support or money. It takes a complete weirdo not to feel that way.
During the time Zuckerberg started Facebook he sent text messages like this to people.:
He even held contempt for his first website users, saying they were "dumb ****" to trust him with their personal data.
You can read more of these text messages here.
I have a Facebook account but over time use it less and less. I do not feel like it is a safe place and do not trust the site. I now wonder if I should delete it.
If you trust Facebook you probably aren't aware of the fact the company is making secret phone aps that will record your text messages and send them to Zuckerberg's team if you install it on your phone. The story was revealed a few months ago in newspapers around the world, such as this article in Australia.
This is not the kind of company I would ever want to invest in. If it falls to 18 maybe I'll buy it for a trade. But I would never just put my money into it thinking its going to be a great company 10 years from now. Who knows the IPO fallout may cause others to lose trust in the company and open the space for a competitor to take its place. Myspace and the other social media fad sites are gone. Who is to say Facebook won't be displaced one day either. It's nothing but a website.
What do you think?