Is Facebook finally a buy?

FB3.jpgNot surprisingly, I've seen that headline a few times this week. I mean, when the stock of a very successful company loses more than half its value in the space of three months you figure it can't get much worse. Actually it can, given that insiders are now able to sell the shares they received from the IPO. Besides, explains Business Insider's Henry Blodget, Facebook's stock price is still expensive relative to earnings. "At $20," he says, "the stock is trading at 31X next year's projected earnings per share of $0.65. Apple and Google, for comparison, trade at less than 15X." He goes on:

The stock crash has nothing to do with the quality of Facebook as a company. The stock is tanking because investors are radically revising (downward) their outlook for Facebook's future financial performance and earnings. The range of "fair values" for Facebook stock is unfortunately extremely wide, and investors are examining Facebook's recent results and concluding that the fair value is much lower than they thought three months ago.* The market is "re-assessing" Facebook because of three things: 1) the rate at which revenue growth is decelerating, 2) the impact of the shift to mobile, and 3) the decline of the company's profit margin based on the decision to invest more for future growth. All of those factors suggest that Facebook is unlikely to be "the next Google," which is what many investors assumed it would be when it went public. (This was the investors' fault--not yours).

There are two big problems with investing in Facebook - at any price. One is all the noise surrounding the company. It's not just noise about earnings, it's noise about Mark Zuckerberg's house and his wife and whether he should remain CEO, noise about the social media space in general, noise about censoring certain items or deleting certain photos or redesigning the home pages. Too much extraneous noise can obscure what a company is all about. Which leads to the second problem: What exactly is this company all about? As in, how does it plan to grow earnings? Oh, I know there's a plan; it's just that I don't really understand the plan, and I suspect most investors don't either. Facebook is still a very good company, as Blodget points out, and it's going to be around a long while. But there will be lots of bumps and bruises along the way, just as with Amazon in its early years.


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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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