Facebook (FB) has had a tumultuous time since its May 2012 IPO. The IPO price was $38 and quickly headed downhill to a record low of $18.75 in August 2012. The stock remained slumped below $30 per share for most of the year that followed, leaving many investors disillusioned and disheartened.
- During that time there was a wide range of controversy and criticisms surrounding the social media giant including:
- Speculation that CEO Mark Zuckerberg is incapable of leading the company
- A Zuckerberg family photo that stirred up a hornet’s nest about privacy on the social media site
- Reports that Israel used Facebook to target pro-Palestinians, denying them entry to the country
- Many companies pulled their ads from Facebook in response to complaints that the company endorsed content depicting rape and domestic violence
- A PR debacle ensued after Facebook reportedly mistakenly removed posts from a free-speech group citing human rights abuse in Syria
- CEO Mark Zuckerberg’s Facebook page was hacked in order to prove a security flaw existed; an act that initially brought about the company’s refusal to pay the hacker compensation for reporting the security flaw
- Another PR nightmare when Facebook’s participation in a NSA spying program was revealed
And that’s just some of the more prominent and high profile situations, all of which seem to have helped to suppress the stock price.
But then in August something changed. The stock finally jumped past the IPO price and continued to climb steadily, reaching a record high of $50.60. Now, suddenly investors who had shunned the company have become drawn to it again. Yet there are still mixed signals about Facebook’s future.
Analyst Northrop Puckett feels that the stock is overvalued, stating that the company will soon “become a shell of its former self, like AOL”.
“The company has a P/E ratio of 175, which is obviously high. It has a forward P/E ratio of 49, which is also quite high, but better than 175. But it seems over-priced considering its fast 5 year growth rate. The company has a PEG (P/E ratio to growth rate) of 5.74 which is very high. For context, Peter Lynch stated that normal stocks have PEGs of around 1. PEGs significantly under 1 mean that the company may be undervalued when taking into consideration its 5 year expected EPS growth. On the other hand, a PEG of 5.74 either means that the stock is i) overvalued compared to its 30% expected growth rate, or ii) that analysts are way off on that growth predictions. It is worth noticing that if predictions for next year's earning growth are correct, you could then see a more reasonable PEG of 2.16 show up. However, that is still relatively high.
Facebook's price-to-sales ratio sits at a quite high 18.57. Additionally, its Q/Q sales are down -19%. Compare it to another (overpriced) online network -- LinkedIn (LNKD). LinkedIn has a price-to-sales-ratio of 21.42, and a Q/Q sales increase of 59%.
Facebook also has an Enterprise Value/EBITDA of 39, which is pretty high. Other "high flyers" like Chipotle (CMG) and Priceline (PCLN) have Enterprise Value/EBITDA of 21.2 and 22.81 respectively.”
Then on the flip side, Jayson Derrick claims the stock is undervalued and will continue to perform.
“1) Facebook has more than 1 billion users, and is still growing this tally above 20% year over year. The massive amount of data that the company has already collected (and will continue to collect) from the billion plus users will be an extremely valuable asset that can be utilized in various ways to generate revenue.
2) Facebook has a vast array of growth opportunities that have yet to be rolled out or even discovered. Specifically, in the near term, the company will roll out video advertisements for U.S users, which can be rolled out internationally over the coming years.
3) Facebook currently has huge investment plans, which include maintaining data servers to keep up with a growing user base. The company has already spent $595 million in 2013 and expects its investments on infrastructure to total $1.6 billion by the end of 2013. In the short term this can lower margins, but an increased investment is a positive aspect as the company continues to expand internationally and gain new users.
4) Management has silenced the bears and nay-sayers who were convinced that the company couldn't meaningfully monetize on mobile users. The company has, so far, addressed what I believe to be the biggest bear argument and only valid thesis against owning shares. Mobile ad revenue represents 41% of the company's revenue mix and is still in its infant stages with significant growth opportunities over the years. In terms of actual numbers, in the second quarter of this year, the company sold $656 million of mobile ads, an increase from $375 million in the previous quarter.
5) Although engagement levels are always a concern, Facebook's measure of daily average users and monthly average users has remained consistently high and showing no signs of faltering. In July, the company reported its daily active users totaled 699 million for the month representing an increase of 27% year over year. In the same month, monthly active users totaled 1.15 billion users, an increase of 21% year over year.”
While both sides have valid points and arguments, this emphasizes the uncertainty behind Facebook’s stock at the present time. Regardless of which situation pans out, one thing is certain, purchasing Facebook stock any time soon is going to be a gamble that should be severely scrutinized beforehand.
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