I heard it when the company came public. So many people wanted to buy Facebook Inc (NASDAQ:FB) stock. In fact, many people were talking about buying Facebook stock on Facebook itself. How has that worked out for them? Uh…not so well. S&P 500 up 28% (not even including dividends), Facebook Inc (NASDAQ:FB) down 36%.
Now, the stock sits under $25 (as of this writing). And what do I hear again? People wanting to buy Facebook Inc (NASDAQ:FB) stock because it’s so “low.” Since I’ve had so many people ask me about it, let’s lay it out and put it in perspective.
By now, everybody knows how terrible the IPO was. It opened just shy of $40 and headed straight down, not stopping until the stock value had been cut in half. A bad IPO does not necessarily doom a stock forever. Remember that this is an actual company with real operations. If the stock price had opened around $20 or so, it might still be an underperformer, but people wouldn’t be crying so much. Let’s not beat-up the company simply over a bad IPO.
We start to run into trouble when we look at the market cap. Currently, Facebook Inc (NASDAQ:FB) has a market cap over $59 billion. For perspective, I could total the market caps of LinkedIn Corp (NYSE:LNKD) (more on them later), salesforce.com, inc. (NYSE:CRM), and Citrix Systems, and still not come up with $59 billion of market cap. Say what you will about those three companies, but why would I think that Facebook is worth more than all three of them combined when it hasn’t proven long-term profitability?
One of the biggest problems with Facebook is that it’s already reached a very high user count. It’s not like there is a vast market (aside from China) that is untapped for them. Facebook Inc (NASDAQ:FB) is trying to figure out how to monetize the network it already has. The situation would be far better if it had already monetized it and was working on expanding its network.
The problem is that Facebook now has to figure out not only how to monetize its network, but it also has to figure out how to keep its network. There’s plenty of competition from other companies. Those companies haven’t reached Facebook’s scale yet, but that doesn’t mean they won’t try.
It’s tempting for investors to gravitate to the P/E ratio to start most valuation discussions. However, in a company that is valued for high-growth (whether it should be or not), the P/E can be misleading, especially when it is sky-high. The problem here is that such situations are generally reserved for small companies in the early stages of their growth. They may not have much earnings because they are building an infrastructure, or spending a ton on marketing efforts. Facebook should be well past that point given its scale.
Regardless, I won’t belabor the P/E issue, but instead look to a simpler metric: Price-to-Sales. Unless you’re subject to some goofy accounting rules, revenue doesn’t lie. So, it’s a bit easier to compare the company’s price to its sales. In this case, Facebook Inc (NASDAQ:FB)’s Price-to-Sales is a staggering 10.8! Since I promised some perspective, here are the Price-to-Sales for some other companies:
Apple – 2.5
Microsoft – 3.8
Google – 5.4
LinkedIn – 16.9
salesforce.com, inc. (NYSE:CRM) – 7.7
Citrix – 4.6
Again, you’re paying quite a premium in hopes that Facebook can hit it big and figure out how to monetize its network…quickly. That’s not a risk I’m willing to take until it can show some better growth. A good product and a lot of users don’t automatically convert into dollars.