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Finally, a Facebook skeptic.
Facebook’s valuation is “significantly overpriced” when compared to other tech giants, says Brian Hamilton, chief executive at Sageworks, a firm that analyses privately-held companies. Last week, Facebook set the price range for initial public offering at $28 to $35 a share, targeting a valuation as rich as $96 billion. That would be a record debut for an American company.
“”This is a rich valuation and exposes investors to downside risk,” Hamilton says.
For instance, when Microsoft went public, its valuation was over $500 million and its trailing annual sales were $140 million, a multiple of about 4, he says. The average valuation of a tech company in recent years has been around four to ten times its trailing sales figures, Hamilton says. By comparison, Facebook is asking for 25 times sales.
“Facebook is significantly overpriced and this is clear by looking at the price of the company relative to either sales or earnings,” Hamilton says. ”Investing in the Facebook IPO may turn out to be a great investment, but right now, the stock is clearly not a bargain.”
Wall Street analysts have started releasing their views on Facebook, which is scheduled to begin trading on May 18. The consensus has been overwhelming bullish, so far. Sterne Agee on Monday initiated coverage at “buy.” Wedbush Securities, the first firm to rate Facebook, on Friday assigned it an “outperform” rating and a $44 price target. Evercore Partners said the company should be valued between $140 billion and $160 billion.
But Hamilton maintains Facebook has a valuation problem. He even attempts to put Facebook’s valuation into perspective by comparing it to Apple, the most valuable company by market capitalization in the world.
“If Apple, which manufactures tangible products, was valued at a multiple comparable to Facebook, Apple's market capitalization/value today would be approximately $2.7 trillion,” he says.
As of Wednesday’s close, Apple had a market cap of $532 billion, according to FactSet Research.
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Here’s the deal. If it’s overpriced (which we all know it is) it would be prudent to short the stock.
Here’s the problem with Facebook’s future revenues. The moment they become public, the pressure to drive revenue to meet expectations will drive exactly the kind of aggressive and predatory marketing behavior that alienates their users. The quick revenue for them is in leveraging user data–either selling it to 3rd parties, or using it to target users with ads, emails and promotions–and those actions will stem exactly the kinds of revolts that have been signaled in past responses to their privacy changes. They’re walking a tightrope. I think the investment by Goldman, and now the IPO, is a grab for cash before the bottom falls out with users getting bored of Facebook.
Valuation in terms of sales and earnings can be misleading with Facebook, because the stock price is based off of people’s perception of future earnings. At the rate Facebook has exploded over the past few years, i feel the stock price reflects the perception of the company accurately. Is this an over-valuation? Probably.
I fully agree with the author. I cannot see a way Facebook can ever come up with revenues and profits justyfying this valuation.
As usual, primary preferred investors will quickly snap up the IPO and almost immediately unload when the second wave of investors begin penetrating the market. Just as in the late 1990s, this IPO is rigged.
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