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Will Facebook Stock Plummet Further?

Updated on September 18, 2012
Investing in a House of Cards?
Investing in a House of Cards? | Source

“If Facebook traded at Apple and Google's valuation based on Wall Street's current estimate for Facebook's 2013 earnings ($0.60)...it would trade at $6-$7.” -Henry Blodget, BusinessInsider.com

Facebook’s IPO has come and gone. What have we learned from it?

A blog entry by Henry Blodget in May is interesting enough to discuss now, since we’ve seen the results of Facebook’s IPO.

Google’s revenue is 10x as big as Facebook’s. Google also has more cash flow than Facebook has revenue. Facebook’s free cash flow is negative. So why was the market valuing Facebook at 1/2 Google’s value?

Source

Apple is another company worth comparing to Facebook. The market has been valuing Apple at 10x 2012 estimated earnings per share. Compare this to Facebook at its IPO price, when the market for some reason valued Facebook at nearly 65x consensus 2012 estimated earnings per share.

Advertising revenue growth for Facebook in Quarter 1 was a disappointing 37%. This is another point that makes us wonder why Facebook is supposed to be a major threat to Google. Google’s display-ad business competes with Facebook’s, and is growing faster than Facebook’s.

Also, Google+ is gaining followers in direct competition with Facebook.

Facebook does not seem likely to re-accelerate in growth, but this it must do. If Facebook continues to decelerate, it should not have a multiple vastly higher than Apple’s, which we pointed out above is trading at nearly 10x 2013 estimated EPS, and Google’s, which is trading at approximately 12x 2013 estimated EPS.

Searching for a Pot of Gold?

Searching for a Pot of Gold?
Searching for a Pot of Gold? | Source

Apple and Google are two of the top tech companies in the world, so they are certainly worthy comparisons for Facebook.

Blodget points out further reasons to be skeptical of Facebook’s future earning potential.

For one thing, Facebook founder Mark Zuckerberg is open about the fact that his priority has always been his company’s social mission -- not its business.

Secondly, Facebook has already been trying to monetize its users for several years. Facebook business boss Sheryl Sandberg has been on this task for 4 years.

Finally, most of the wealthiest people have already joined Facebook. The benefits from having them should already have manifested.

Certainly Facebook aims to go after more of the world’s population, but they will not be primarily from the wealthiest elite. It is estimated that Facebook’s next 1-2 billion users will come from populations less valuable in terms of money-making than the first group of users was.

Comparable companies like Apple and Google have already proven they can make profits much more than Facebook has. Hype, rather than logic, seems to continue to influence Wall Street.

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    • Robin-Jones profile image
      Author

      Robin-Jones 18 months ago

      Thanks for the insightful comment!

    • Cogerson profile image

      Cogerson 4 years ago from Virginia

      Interesting view of Facebook....I think it will only continue to go down...although it has been bouncing back a little....as I type this comment it closed the week at $22.86....I think your comparison to Google is a very good one....Facebook just does not have the revenue streams that Google does....so why in the world was it valued so high?

      Part of me thinks Facebook's time is starting to go down the mountain of fame....and the next big thing will be here soon....I think Twitter is Facebook 5 years ago....which means? Facebook could become the next My Space....technology is a fickle thing....I feel sorry for those people that bought Facebook at $38 a share. An enjoyable read....voted up and interesting.