Monday, September 24, 2012

More Bad News for Facebook Stock

We've been writing about Facebook shares and saying that we have had, currently have and plan in the future to have no interest in owning them.

Here's an update from today's trading in Facebook trips Nasdaq breaker, down 10%:

" (MarketWatch) -- Shares of Facebook Inc. FB -9.54% continued falling Monday, tripping the Nasdaq's circuit breaker meant to shield stocks from manipulation by short sellers. Facebook was last trading down 9.2% to $20.76. The stock earlier fell by at least 10% from the previous session's closing price, triggering the Nasdaq system which imposes a restriction on prices at which a stock can be sold short. Facebook took a hit from a Barron's report arguing the stock is worth just $15. In a note, Stifel analyst Jordan Rohan said investors "may be assuming incorrectly that Facebook will show upside soon from mobile," following upbeat remarks from Chief Executive Mark Zuckerberg at the Sept. 11 TechCrunch Disrupt conference."

For those interested in reading the Barron's article, just click on Still Too Pricey which says in part:

"Facebook's 40% plunge from its initial-public-offering price of $38 in May has millions of investors asking a single question: Is the stock a buy? The short answer is "No." After a recent rally, to $23 from a low of $17.55, the stock trades at high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows.

The rapid shift in Facebook's user base to mobile platforms—more than half of users now access the site on smartphones and tablets—appears to have caught the company by surprise. Facebook (ticker: FB) founder and CEO Mark Zuckerberg must find a way to monetize its mobile traffic because usage on traditional PCs, where the company makes virtually all of its money, is declining in its large and established markets. That trend isn't likely to change.

Success in mobile is no sure thing. The small screens on these devices don't give Facebook much room to configure ads without alienating users. . . .

AT ITS CURRENT QUOTE (before today's trading), Facebook trades at 47 times projected 2012 profit of 48 cents a share and 36 times estimated 2013 earnings of 63 cents. Compare that with Google and Apple, two proven technology growth stories, which both trade for about 16 times estimated 2012 earnings. Facebook is valued at $61 billion, or $53 billion excluding its estimated $8 billion in cash. That's more than 10 times estimated 2012 revenue of $5 billion. Google trades for half that valuation.

What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street's consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share. . . .

Ours is admittedly an outlying view on the stock. Only one of the almost 40 Wall Street analysts covering Facebook, Dan Salmon of BMO Capital Markets, has a price target of $15. Most are in the high $20s or $30s. Many of these firms initiated coverage of Facebook with price targets in the $40s.
Barron's, it bears noting, never bought into the pre-IPO hype. . . .

Even with the sharp drop in its share price, Facebook remains a richly valued bet on the company's ability to wring a lot of revenue from a huge and potentially fickle user base. Facebook's mobile woes aren't likely to go away. Stay away from the stock. It could be heading to the mid-teens."

Summing Up

(1) Facebook has no well established track record of earnings. (2) It also has a rich price for its shares with respect to its price relative to earnings. (3) Besides, there are too many other nice looking fish in the sea of stocks.

All of these factors make it a good idea to continue to watch the Facebook share price action from the sidelines.

By so doing, we can all learn or relearn, as the case may be, a good and cost free investment lesson about companies, their stock prices and what happens when people buy shares solely for emotional reasons or because everybody else is doing it.

Following the crowd in and of itself is never a good reason to buy. It's just an easy way to lose money.

Thanks. Bob.

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