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Friday, May 18, 2012

Facebook is a joke as an investment

Regardless of whether Facebook "sticks" (is not a fad that fades away), as an investment, the company is, simply put, a joke.  Today's IPO, which priced at $38 per share, values the company at around $104 billion.  With about $1 billion in earnings over the past year, this valuation makes the price-to-earnings (P/E) ratio over 100.  This is a valuation that gives me flashbacks to the tech bubble of 2000, when analysts started inventing new valuation metrics because the current ones made the companies look so ridiculous from an investment standpoint.

One thing I have learned over the years is that the small investor never learns.  I have no doubt that Facebook will be a hot deal today.  When the stock starts trading around 8 a.m. pacific time, I am sure it will immediately trade to a premium.  Who cares??  Unless stockholders are looking to flip the stock today, what happens in today's trading is meaningless.  As a real investment, I have never seen any company justify a 100 P/E, and I promise you, we are not seeing one today.  Facebook, like all other Internet-based companies like it, depends on advertising revenues primarily.  There is no way in hell that they will ever generate enough advertising revenue to make a dent in the current 100 times earnings valuation.

I would not touch this stock and you shouldn't either.

2 comments:

  1. A collection of funny late-night jokes about Facebook. ... looked at pictures of their friend eating a sandwich, and thought, 'Now there's a sound investment. opening a gold ira account

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  2. Unfortunately, many Internet startups began having IPOs without any semblance of earnings and without any plans on being profitable. These startups were funded with venture capital and would often end up spending all the money raised through the IPO, making the original owners rich in the process and leaving the small investors holding the bag when the shares became worthless.

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