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FaceBook $100 Billion Internet IPO Emperor Has No Clothes, Investors Could Lose 85%

Companies / Tech Stocks May 18, 2012 - 05:12 AM GMT

By: Nadeem_Walayat


The Facebook IPO at $38 a share to raise $18.4billon is expected to value the social media company at over $100 billion that reeks of another LastMinute Dot com investors being suckered moment. Now Facebook clearly has value by virtue if its 900 million subscriber base, however valuing the company at X100 earnings is well on par with that of the peak of the last dot com bubble. The IPO itself illustrates that public investors are being sucked in by media hype as the amount to be raised has risen from first $5 billion, to $10 billion and to finally over $18 billion as major private investors including Goldman Sachs and Russian billionaires cash out as they offload stock to the public.

The problem with Facebook is that it is already flat-lining in terms of revenue growth so not only is it over priced at 100X earnings but there is also no significant revenue growth to bring that high valuation down. For instance Facebook promotes itself on the basis of having 900 million subscribers, however to me that suggests that it is already a saturated market, where are new subscribers going to come from to grow the revenue?

Investors need to realise this that Facebook is no Google, the closest stock to Facebook is Yahoo which is priced at X17 earnings, so the Facebook IPO is being priced at X5 its real value.

This suggests there is going to be a huge overhang of stock that at the very least points to a stagnant stock price for many years and more probably a severe bear market that could see a loss of value of over 80%.

Comparing Facebook to the most successful internet company to date, Google which trades on a P/E of 19 means that Facebook investors face a huge challenge as Facebook would need to grow their earnings by X5 just to match Google. When the reality is that Facebook can never match Google's profitability.

Facebook in my opinion is a re-run of the lastminute dot com bubble IPO, that saw the value of initial investments all but wiped out. Facebook is probably being priced at X6 its value therefore investors have the potential to sufferer as much as a 85% loss on the IPO before the stock hits bottom.

The expected slump in the Facebook stock price could start as early as today when the stock starts trading.

Hedging Opportunity - Buy Google and Short Facebook

Bottom line - If you want to invest in Facebook, then you will be able to pick up the stock at a fraction of its IPO price in the not too distant future.

Future Forecast - Facebook is a re-run of, and just like last minute, all of the media hype surrounding Facebook will soon evaporate and many people in hindsight will start to write how it was always obvious that the numbers never stacked up. Facebook as an investment was always destined to fail because it was not even equal to half a Google despite being valued as 5 Google's. I would not go as far as saying Facebook is the next MySpace, but its not that far off from following a similar path towards oblivion, in fact if Facebook accrues a mountain of debt then at some point it will be taken over by a cash rich company such as Google, Apple or Ebay to gobble it up at a fraction of its IPO price.

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2012 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Dr Ray
18 May 12, 12:10
fools and their money

I agree with almost all you have written but I welcome the FB IPO as it very effectively separates stupid people from their wealth. In a fair world stupid people should not have money but through good luck, theft, or getting it from even more stupid people, wealth often ends up in undeserving hands.

Facebook just redresses the balance.

20 May 12, 23:00
Facebook a lot like Amazon? (HIGHER PEs needed)

Nadeem, I value your opinions on many financial matters.

But on the issue of Facebook, I do believe you can't just narrowly hone in at the P/E ratio. Social networks are still in their infancy phase with FB clearly the leader with millions more users MySpace ever had. It's an evolutionary step-up if you will.

Now I'm not saying FB will ever approach Google's P/E within the next few years, but I think FB's stock behavior in the next few years will be akin to Amazon's (P/E ratio of 176!!!) as they look for ways to monetize their traffic/subscribers.

Here are 5 reasons I believe FB's stock will NOT drop 80% in the next few years (bar any black swan macroeconomic meltdowns)

1. both FB & Amazon are bellwethers by huge leads/margins in their respective industries

2. both stocks reflect the lofty P/E ratios of the 90s, when the internet bubble had not busted yet

3. both are radically changing business models in their respective industries, conjuring up new ways of generating revenue every quarter! (e.g. Amazon getting into hardware with Kindle)

4. both are led by very strong & visionary leaders who don't back away from turning partnering or competing industries upside-down

5. FB is lead by a very strong team + new recruits other than CEO Zuck, in Google's ex-VP Sheryl Sandberg. FB's approval rating is very high at 4.5 (, so they are recruiting the top grads at all the best educational institutions.

FB to drop 80%? No. Overvalued? Maybe.



21 May 12, 02:35
UK Economy

Hi Nadeem, Was wondering if you would be kind enough to give an updated forecast of the UK economy in terms of GDP and prognosis on near term and future unemployment. Facebook is important but its largely irrelevant it will be forgotten about in 5/6 months, whats more pressing is future GDP and unemployment rates. By the way your analysis from 2010 as so far proved incredibly accurate, but unfortunately things have turned out worse than you predicted, with GDP way way way below 1%.

Keep up the good work, and I look forward to the analysis

Kind Regards


21 May 12, 08:25

Hi Nadeem,

Love the effort to save just a few people from this grossly mis-priced IPO. Trading flat-lined in the last 20 minutes at 38 to save face for the underwriters as well.

Any thoughts on TLT being at the 125 previous high point of the 2008-2009? My own analysis of the rare convergence of the 400sma (recession line) and 200sma is telling me that 1250-1275 is the make or break zone if the euro-crisis is to settle down.

I guess the scenario here is that either bonds breakout and we have a lehman type shock or this really is the opportunity of the year to by stocks from 1250-1300.

Always appreciate your thoughts.

-Jake M

21 May 12, 21:31
Facebook Investors Zuckerberged


My guestimate is 85% loss, the range is 70% to 90%. It's already down about 25% from Friday's trading high.

I am taking account of more than P/E i.e. its revenue growth prospects.

I'll look at the ecomnomy and other markets after another article on Financial Armageddon.



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