The long-awaited and overhyped Facebook (NYSE:FB) IPO came out neary two weeks ago, and it’s not going well to say the least.
No surprise here — the company and the stock are grossly overvalued sporting a trailing P/E of around 80. At that valuation Apple (NASDAQ:AAPL) shares would fetch $1100 per share. Facebook sells for 25 times revenue; Google (NASDAQ:GOOG) for five times revenue.
Adding to the woes, the growth rates for advertising revenue fell to 44% in the fourth quarter of 2011 (year over year comparison), a big drop from the 77% number in the third quarter and the 83% number in the second quarter. That is a clear trend line. And if that trend continues the company cannot meet most analyst estimates and certainly cannot justify anything near its current valuation.
So should you consider buying FB stock? Not by my book. Here are 8 reasons why:
Most revenue estimates for the company – and the company’s own estimates – are based, in my opinion, much more on growth per user than growth in users. Going through the numbers the central promise and premise of Facebook is the company will be able to extract increasing amounts of revenue from each user. The company’s S-1, the registration statement filed with the SEC prior to an IPO, states Facebook will be able to increase its advertising rates due to its ability to, over time, improve the efficiency of ads. Do not tell that to General Motors; that company just decided Facebook doesn’t work for them and are no longer advertising on Facebook.
Web advertising is about search and it is an open question how many of Facebook’s 900 million users – or the targeted two billion users at some time in the future – use or will use Facebook to find things. Question: Will it be easier to find something on Facebook or to click over to the next tab on your browser and Google it?
Facebook’s projected growth rate is multiples of the growth rates for online advertising in general. Translation: FB needs to take market share from Google and other purveyors of online advertising in order to hit revenue estimates. Take market share from Google? Maybe a point or two but a big chunk? Ain’t gonna happen.
Facebook’s user base is not growing, in quality, as fast as the hope and the hype. How could it – it already has more than 10% of the human race inside its walls. Why is this important? Users not already in are going to come from demographics — kids getting older, Boomers getting bored in retirement — but mostly from emerging markets such as India and China.
Potential revenue growth from these markets is much smaller on a per capita basis. More importantly, the Chinese will never let Facebook operate as it does here and FB will always be a second provider, as Google is to Baidu (NASDAQ:BIDU). The Chinese have forgotten — excuse me, never knew how to spell – World Trade Organization and never met a foreign company they would not slap down if it grew too big.
Online social game provider Zynga (NASDAQ:ZNG) is 12% of revenue – admittedly, that percentage is declining. A Zynga hiccup and FB misses estimates. Zynga stock is down more than 50% from its high, not an endorsement of the company’s business model and prospects. Not a good thing.
Mark Zuckerberg still completely controls the company. He is not Steve Jobs or Bill Gates, who, while being technical greats, were business geniuses, Jobs designing products that people wanted to buy, Gates selling products using a business model that forced people to buy. Both these men had serious failures; both gave up operating control of their companies to others over time, Jobs claiming it back after Apple almost went bankrupt. Bottom line: Dan Quayle was no John Kennedy and Mark Zuckerberg is decades away from potentially being something akin to Jobs or Gates.
All of these objections are nits and gnats compared to the next two.
Article printed from InvestorPlace Media, http://investorplace.com/2012/05/8-reasons-you-should-avoid-facebook-fb-aapl-goog-bidu-lnkd/.
©2013 InvestorPlace Media, LLC