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Facebook (Nasdaq: FB) is a growth stock. There is no debating that fact.
Based on the company’s expected future growth rate in the 40-50% range, I would peg a fair value on the stock of 40 times this year’s earnings. With two analysts currently expecting $0.50 per share, that translates into a share price of $20.
Even if the shares fell to $20, I still don’t think they’re a “buy.” I would be looking to buy shares of Facebook at a discount to this fair market value – perhaps around $15 per share.
I have no idea whether Facebook shares will continue to drop. Even if shares fell to $15 or $20, I would still have a number of concerns about buying the stock.
But in the mid to high $30s, the stock is just overpriced based upon the company’s financial results. While the stock may appear “cheap” compared with Apple (Nasdaq: AAPL) at $554 or Google (Nasdaq: GOOG) at $598, don’t be fooled by the high dollar amount of these share prices. High share prices don’t mean a thing when it comes to valuation.
Three years from now, Facebook is likely to be trading at a valuation of 20 to 30 times earnings, just like many of its tech stock peers on the Nasdaq. And I would be willing to bet that the valuation remains below $100 billion for years to come.
So congrats to Mark Zuckerberg on his success and newfound wealth. But better yet, congratulations to you for showing some discipline and sitting on the sidelines during this Facebook IPO hysteria.