Investors were whipped up into an absolute frenzy, ahead of the float, in May 2012. IT Issues at the NASDAQ, on listing day, as well as a revised-up offer price, saw the stock trade as high as $45 on day one, before sliding into a downtrend until September, hitting a low of $17.55. The stock has put on weight, since then but with several hangovers, such as lock up stock, held by employees etc – to give you an idea December 13th will see another 124m shares (5% of the company’s stock) hitting the market. The weakness in the share price (currently $27.50) has also prevented a secondary offering – something that could normally be used to offload lock up stock etc.
Then there is the tax bill the company is facing. A share buyback is unpalatable – effectively providing a free put option for many staff shareholders. And now the BIGGIE – how can the stock justify its stratospheric (not sure what hyperbole comes next – cosmic?) valuation???
Facebook, is trading at around a 32 x its earnings figure (ie its share price is 32 x earnings) and to give you a relative comparison, Ebay 17x, Google 13x and Apple 12x. In other words, if Apple was trading on FB’s multiple of 32x, it would be well over $1500 per share (currently $585). Now we are bullish on Apple – but not quite that much, and let’s face it, Apple is outstandingly great at dollarizing its products!!
So where will FB’s revenue come from to support this lofty valuation? While the company has come in with earnings that are, to date, ahead of expectations, where is the big growth?
As a caveat here, I am no technology analyst. That said, I cannot see how the company can sustain that kind of valuation. To date, the attraction of FB, as a product, has been that it is free and not a place to get bombarded with adverts. As such, the company needs to perform an outstanding balancing act between keeping two groups happy – its investors and also its users. Both have differing needs – one group want a return on investment, the other – a cool product that doesn’t bombard them with unwanted advertising. Now there will be some great things to come out of this – Facebook Gifts being one such example – but again, where is the broader growth, particularly in the mobile market?
Enter social media marketing
Google’s Pay Per Click and Google Ads have been a massive godsend for anyone in business over recent years (as they have for those companies too). Targeting your audience and meeting your budget being just two of the big benefits. FB is increasingly appealing, given how targeted you could make your marketing. Equally some of the viral material – “like this” type stuff have also got great traction – but can be short lived – remember Kony 2012? Having followers is one thing, getting them to spend is another. Perhaps over time, both sides will learn to accept and respect each other.
There can be no question that social media is a vast, growing and as yet, relatively untapped channel for business, the question is, will Facebook provide an investment opportunity to tap into?
I’m hardly a dinosaur, but when I am looking for information or better yet, want to purchase something, my first port of call (on any one of my Apple devices) is usually Google or Amazon and Centurion’s Concierge. However, “Generation Me” are far more likely to want to Like, Poke, Comment, Tag and purchase (with Mum and Dad’s credit card) through Facebook. As such – the growth potential is most certainly there and is MASSIVE – particularly given the conclusive proof of shopping’s evolution from “bricks to clicks” during the past two decades.
The question is, will the product evolution and growth come quickly enough to support the current FB valuation and stock price – afterall, we are only looking at Facebook stock forecast 2013 here…
If “Generation Me” is the target market, then things need to happen, pronto, as this generation has a notoriously short attention span (think Ritalin and ADHD), not to mention the added threat of something new and shiny comes along as the new latest and greatest, must use app.
Being around markets for a while does come with some advantages. One of them is that I was trading throughout the technology boom and its subsequent bust 13 years ago, and there just seems to be a slightly familiar feeling to this story.
Just out of curiosity, looking at FB if it were trading on a similar earnings multiple to Apple, FB would be closer to $10-12. Anyway, it isn’t, so let’s not go there… Short term, my outlook for Facebook will be contained to $25-27. I could well be wrong, and as I say, I am not a Tech analyst, but I keeping thinking of a real classic – Little River Band and the song “Hang on, Help Is On Its Way, I’ll be there as fast as I can….”
Like all forecasts or predictions given at any time, these can very quickly become out of date. This is a critical point when it comes to successful trading and investing. It is not really about successfully predicting what may happen – the real money is made by responding to what is actually happening and by taking the necessary action accordingly. For many, joining the dots between theory and practise can seem daunting and perhaps confusing so, to make that journey so much easier and one that caries confidence, why not check out one of our free online training sessions. Click here to register