Sell Facebook, Buy Google
Glen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hi, my name is Glen Bradford and I have set out to price the entire market here at the Motley Fool. This is me setting aside time to do just one company: Facebook. It ends up that the resultant of this exercise is me demanding that you take your Facebook money and buy Google (NASDAQ: GOOG) instead!
There have been a lot of valueless opinions floating around about the Facebook IPO. When it comes to purchasing a stake in a company, the two things that matter are the future discounted cash flows and the price that you pay to acquire a stake in those cash flows. Thus, arguments like: You should buy it because you use it, you should buy it because it's like Google, or even you should buy it because I said so simply don't have credibility. Look back to the internet bubble of 2001 if you need to for reference purposes. In the meantime, I'll walk you through valuation points on their S-1.
With a growth rate of 39% as of their last year, note that their growth is decreasing from the year prior, I'd say that you have to use a peaked model to calculate their stock price. Ouch. I'd say that Facebook will land somewhere between 30x and 60x earnings. That puts my price target between $12.9 and $25.8. That puts my personal valuation of Facebook between $20B and $40B. That's what I would pay. Let's see what the market is willing to pay.
Last I checked, I hear their latest valuation is around $90B. That's a stock price of around 134x earnings. That's what I would call...insane. The ROI for anyone who buys at that valuation is likely going to be negative. Let's compare that to a company that I love and think is cheap: Google. Google makes $10B and ballpark is trading at $200B. That's a P/E of 20 for a name brand company growing at a 25% clip. That's cheap!
So, in a nutshell, Google costs twice as much as Facebook to own and they make 14x as much. This is a no brainer.
Sell Facebook, Buy Google. I think that's what the purpose of the IPO is. It enables the current investors to sell out at a ridiculous valuation. My advice, steer clear of Facebook.
Glen has no positions in any of the companies mentioned. Glen thinks you are ridiculous if you have a long position in Facebook and don't know what P/E means.