FB opinion from 5.18.12

Today the excitement is abound for one of the biggest tech IPO’s in history.  As Facebook begins trading today under the symbol FB the question is should you buy?

First let’s talk fundamentally about the stock offering and it’s price.  The ipo is offering the stock at 38 dollars a share with roughly 423 million shares outstanding which would make the market cap of FB roughly 104billion.  To compare that to other companies AAPL is over 500 billion in market cap and Exxon is over 380 billion  and Johnson and Johnson roughly 128 billion.

To put the stock in perspective Facebook earns roughly 1 billion dollars a year, so on open will be trading at 100x current earnings.  Exxon makes roughly 39 billion dollars a year and yet trades at roughly 10x earnings.  AAPL makes 38 billion dollars a year and yet trades at 13 times earnings.  When looking at it this way does this IPO even make any sense. While we may be wrong in the short-term the stock is overvalued dramatically and reminds us of the tech bubble that existed in the late 90’s.

To take a bet on the future of Facebook you will be betting that they will begin to truly multiply their earnings by roughly 30x just to trade at 30x earnings.  Currently the S&P trades at roughly 13x earnings so FB would have to multiply their earnings by 30x just to trade at 3 times the P/E of the S&P 500. What will happen no one knows yet, but the downside looks a little too uncomfortable for this advisor to take that chance.

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