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It’s time to talk about the very, very rich valuation of Facebook (Nasdaq: FB) shares.
Facebook went public with a valuation of $104 billion. The company’s debut on the Nasdaq valued the stock at more than Amazon, Dell, Disney, McDonalds or Target.
Impressive? Yes. But is it justified?
At the $38 per share IPO price, the Facebook valuation was 89 times 2011 earnings and 76 times 2012 earnings estimates of $0.49 per share.
Valuations like this occur from time to time. However, as a company matures, its growth rate begins to stall. It appears that we are already experiencing this with Facebook … and the company just went public.
Investors are willing to pay more for high-growth stocks, because they expect bigger profits down the road as a result. Therefore, some high-growth stocks trade at premium valuations – 50 to 100 times earnings. However, investors can justify such premium valuations only when the growth rate is impressive. Once growth rates start falling, valuations quickly come under pressure.
For all the hype of the Facebook IPO, this appears to be happening. During the stock’s debut last Friday, underwriter JPMorgan (NYSE: JPM) was apparently in the market aggressively supporting the stock at $38 – buying lots of the stock that was sold in the open market. While this provided some support to the shares last week, it appears to be temporary.
On Monday, Facebook shares fell 11% to $34. And again on Tuesday, the stock was down almost 9%. It hasn’t recovered much, closing at $33.03 per share on Thursday.
It is worth noting that Facebook “insiders” – including Mark Zuckerberg, other executives, venture capital firms, and other early investors – were big sellers of stock at the IPO. Combined, they accounted for over one-half of the shares that were sold to the public. With insiders cashing in their stock and locking in gains, you have to question whether they think Facebook is a good value at $38 – or even $31 – per share.
To read more about the Facebook IPO and the five red flags that should keep you from investing in this overpriced stock, click on the following links:
Five Reasons to Avoid Facebook (FB) Shares
Facebook Advertising is Ineffective