Facebook With a Billion Users Still Isn’t Worth the Money

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite the fact that I use Facebook (NASDAQ: FB) on a daily basis, I don’t particularly like the website. It eats up a large chunk of my time, which is mostly spent checking up on people I don’t even really know. In my opinion, instead of bringing people together, it provides a phony proxy for a social life. Additionally, its shares have performed terribly which, after bombing over 40% from its IPO price, still appear to be heading further south. In this article, I will explore some of the reasons I believe Facebook doesn’t warrant a buy, or even a hold, at current price levels.

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First and foremost, based on the fundamental metrics the stock is laughably overvalued. The P/E sits at a bloated 120x which is high even for the 36.7x industry average. The forward P/E is a more reasonable 40.7x, which is still too high in my view. This rich valuation is thus reminiscent of another tech company, Amazon (NASDAQ: AMZN), which has an even more obscene multiple of 310x TTM earnings. However, at least Amazon appears to be growing revenue. Furthermore, Facebook is priced at 6.7 times book value, 15.4 times sales. A company would have to be doing very, very well in terms of earnings and growth prospects to warrant such a valuation. Unfortunately, this is not the case.

Revenue has been declining steadily since 2009, while the 2011 EPS growth rate trailed the industry by almost 12%. 2012 Q2 EPS met expectations of $0.12, which isn’t particularly convincing. Taking the 2011 EPS of $0.43, and assuming a more modest P/E of 30x earnings, Facebook should be trading around $13 dollars. Still, somehow the market seems to think a price above $20 dollars is acceptable. I beg to differ, as the company offers little in terms of growth prospects, despite its huge user base.

Indeed, Mark Zuckerberg was ‘immensely honored’ at the news of Facebook users breaking one billion. While this is a very impressive figure, it hasn’t yet translated into earnings for the company. Despite roughly 600 million people using their phones to access the website, Facebook isn’t making money in this segment. Some Wall Street commentators have referred to this as Facebook’s ‘mobile problem’. Still, the company has a number of avenues in which it hopes to expand.

One of these is corporate services such as analytics, in which several companies have expressed interest. Facebook is also starting to expand into the E-commerce segment, mainly in the way of gifts. Fortunately for them, Facebook doesn’t have much in the way of competition any more, after sites as MySpace have largely withered and died. One could consider LinkedIn (NYSE: LNKD) a competitor, although it is aimed at professional rather than social contacts. In the category of ridiculously overvalued stocks, LinkedIn beats even Amazon with a P/E of over 1000x earnings and a price to book of 22. Why anyone is still buying these stocks is beyond me.

So, in summary, I think Facebook doesn’t warrant its current price level. I’d like to see it trading closer to $13 to even consider getting in. Revenue and EPS are similarly unconvincing as the company simply does not appear to be making much money. Nevertheless, there are a number of ways in which the company hopes to expand, and it will be interesting to see how this massive brand name develops as a company and stock in years to come.

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DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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