This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Facebook IPO: Reality Check

You see, the market at a certain point stops thinking about anything but results. The idea that a stock price can only move skyward just evaporates. When it eventually does, a company's value will always be compared to its ability to generate cash earnings.

So take a careful look at what Facebook actually makes and what it earns, and ask yourself what you'd pay to own a piece of that business. At 30% growth a year through the end of 2014, Facebook would have $8.1 billion in revenue and earn $2.2 billion. That level of growth would thrill any reasonable business owner. But at 19.6 times earnings, it means Facebook is worth $43 billion, or 57% less than the top end of its offering price.

4. Assume a Reed Hastings moment.

Everyone likes to talk about what a genius Mark Zuckerberg is. He well may be. But even the greatest tech visionaries make mistakes, and they can be very costly.

Assume the best-case scenario, which is where online movie rental outfit Netflix (NFLX) found itself. Investors had been lulled by consistently good numbers, profitability and sunny outlooks. Then, reality intervened. A mistake was made. And Wall Street remembered that the genius at the helm is fallible, that the company isn't bulletproof, and that all the gains priced into a coveted stock can be erased in the blink of an eye.

This is a Reed Hastings moment.

Hastings is the CEO of Netflix, and he tried to reorganize his company, rebrand it and also raise its prices. It was too much, and subscribers bolted. And shares of Netflix, one of the Internet's great stock-market success stories, tumbled from $300 in July 2011 to about $62 six months later. Now, the good news is that the shares have come back -- they're up more than 100% from their low. But will they gain another $180 a share and retake the heights they once held? Not a chance. Those gains are gone forever. Netflix came back to a diminished reality.

It has to be assumed that the same could happen to Facebook.

3 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
GOOG $563.32 -0.31%
AAPL $132.96 2.10%
FB $82.75 1.50%
TSLA $229.31 5.00%
YHOO $44.84 0.72%

Markets

DOW 18,127.29 +47.15 0.26%
S&P 500 2,122.07 +4.38 0.21%
NASDAQ 5,103.7760 +11.6910 0.23%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs