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Only Suckers Think Facebook Stock Is a Bargain

Forget 'bargains' — think about whether the company has a future


What do you think of buying Facebook (NASDAQ:FB) now, around $20? — Marianne

I think that you’re better off going to your local casino and playing roulette.

Since its IPO closing price on May 18, Facebook shares have plummeted 50% or so in value. The early days were related to the negativity surrounding the whole initial public offering — the shenanigans by lead underwriter Morgan Stanley (NYSE:MS), for example — but recent troubles are much more worrisome to investors because they include future revenue and profits.

Facebook’s first earnings report as a publicly traded company was less than stellar, though it admittedly met the mark on both revenue and earnings. And while Mark Zuckerberg was on the call, he didn’t say much of substance to encourage investors.

The lack of fireworks means the status quo reigns, and the current situation at FB ain’t all that great.

Consider that it’s still trading at a P/E of nearly 40 on fiscal 2012 earnings even after its flop.

Consider that widely known problems with monetizing mobile persist, and that study after study proves that even ads on laptops and desktops have poor success. Case in point: General Motors (NYSE:GM) made a splash when it pulled Facebook ads this spring, and four out of five FB users said they have never bought a product or service based on ads on the social media site.

Consider the share oversupply as the lock-up period ends, a particularly troublesome factor in a thin market with low volume.

Also consider that Facebook, as an Internet innovator, has a long history of flash-in-the-pan flops to overcome. MySpace, anyone? Even if FB is not a web fad that will pass away in time, there’s the persistent threat of other social media platforms — from players like Google (NASDAQ:GOOG) or Twitter — that might erode market share. (To say nothing of ones we haven’t seen yet from unknown startups or well-heeled tech innovators like Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) that could embrace social media in the near future).

Then there are more general fears — that Zuckerberg has too much power and isn’t serious enough about protecting shareholders, that we don’t have a long enough track record with this newly minted stock to know what to expect … the fears go on and on.

So I have to ask, what’s the appeal of Facebook beyond its reach and brand power? What future developments are there to make investors encouraged or to make them eager to buy?

The fact remains that most people holding the stock are, in my opinion, simply trying to find a good exit point after being burned on the IPO. And anyone naively “bargain hunting” now is doing so on the thesis that Facebook was unfairly oversold.

The bottom line is that you should buy stocks not based on what you see as current strength or unfair action in the past. The best investments are ones where you believe in the company’s future and you are confident they will weather any modest negativity — either in-house or because of broader market conditions.

Can you honestly say that about Facebook?

If not, then don’t touch this company, no matter the price.

There’s nothing wrong with watching Facebook, so long as you do so logically.

The time might come when Zuckerberg & Co. get their act together and the pros outweigh the cons. But that time is not now. There are no guarantees that FB will rebound anytime soon, so keep your money in investments you believe in.

There is a big difference between buying quality on a pullback and Dumpster-diving for trash.

Do you have a stock that’s on your mind? Drop me a line at and I’ll take a look at it.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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