Facebook Post Mortem
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On the eve of the Facebook (NASDAQ: FB) IPO I solicited the opinions of my contacts across the Pacific Rim about what they thought and wrote about it here. When something reaches the level of euphoria of that event it is almost incapable of living up to the expectations.
Think, The Phantom Menace.
Unfortunately, for Facebook the time lost as represented by the lost capital from buying into the hype is far greater than that lost by sitting through an awful movie. In the four weeks since that Freaky Friday the price has collapsed to 81% of the IPO price and is just now showing some signs of investor interest. Volume last week was the lowest of the four full weeks of trading and the price did not drop below the previous week’s low.
The price was not capable of rallying with the general market until late last week. The SPDR S&P 500 ETF (NYSEMKT: SPY) has rallied 6.3% since June 1st while Facebook has rallied 15%. It took a rest, building a base between $26 and $27.80 per share and broke higher on a definitive rally in equities in advance of the FOMC meeting on June 20th.
At this point, however, there is still a lot of potential downside to Facebook’s stock price. Trading at a current multiple of 101, Facebook is hard to justify at that price in this market. If this were 1998 or even 2007 then as the biggest IPO in history it might be a price that the company could grow into. But in 2012 with the western world on the edge of a banking collapse it is hard to justify any stock at this multiple.
Attenuating Facebook’s potential with a good growth stock multiple of 50 that would put the stock in the $15.50 price range. With the Fed announcing more Operation Twist in the short term, there will be a lot of shaking the tree while this plays itself out. The equity markets are levitating right now on the hope that the Federal Reserve and ECB craft not only a bailout package for the European periphery but somehow also stimulate growth. If they cannot resurrect their moribund economies it will be up to the Asian countries of ASEAN plus the BRICS to create growth. In that scenario, however, the majority of the growth will be amongst themselves.
These are markets that are not where Facebook’s growth is going to come from in the next six to twelve months. Hence, why there is talk of them getting into the mobile phone business; attempting to create a form of mobile ecosystem for their platform. This is an idea that has some merit but it is also not something that will be implemented tomorrow.
So, again, there is no compelling reason to own Facebook at this price right now. LinkedIn (NYSE: LNKD) is continuing to exceed expectations both in terms of profitability and potential revenue streams. A recent report mentioned that 32% of asset managers who used LinkedIn to convert contacts into new clients raised their AUM by an average of $1 million from those new clients.
I’m just not hearing that kind of value-add emanating from Facebook at this point.
As I noted just before the IPO, there’s a lot to like about Facebook. There is a tremendous amount of potential, but past the hype and the hoopla, this is a stock that was being priced in December around $10-12 per share. Now with the debacle of the IPO there could easily be a backlash against the company simply because of the bad press. No one wants to be associated with the biggest disappointment of all time.
Just ask George Lucas.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. 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.