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Facebook: 'Like' the Web Site, Hate Its IPO

Analysts don't expect the company to be profitable on an annual basis until 2014, when the average earnings forecast is 4 cents per share. That puts the forward price-to-earnings ratio at 250. Once again, I love the product, but not the stock.

I feel the same about Groupon (GRPN - Get Report), which came public in November at $20 and fell to $10 recently. While the company reported its first quarterly profit yesterday and a solid revenue increase, driving shares to around $15, I remain skeptical of its long-term prospects.

I may be among the few that are not excited about the upcoming Facebook initial public offering. All the hoopla surrounding what might be the largest IPO of all time drives me crazy. But I am a value investor, so you might expect that.

The bottom line is that I don't understand the math. I don't see how Facebook is worth $100 billion, which is more than McDonald's (MCD), on par with PepsiCo (PEP), and about half of Berkshire Hathaway's (BRK.B) value.

In Search of the Next Berkshire Hathaway >>

I've grown a bit weary of Facebook. I use it occasionally, but the novelty has worn off, and I wonder whether that sentiment will ultimately ring true for others. I understand that there are hundreds of millions of users, and it's a real business that's generating significant revenue -- $3.7 billion in 2011 -- and net income of $1 billion, but I simply can't get to a value of $100 billion.

The common thread with all the IPOs I've mentioned is that each of the companies offers useful products or services, but there's a disconnect between their utility and the valuation of these companies. That's not uncommon. IPOs often generate investor interest that drives prices far higher than the company's true value. Sometimes it takes a while for the dust to settle. Along the way, money will be made and lost, but I won't be participating.

Among all of the IPOs of the past year, those that interest me include Spirit Airlines (SAVE), which went public in May 2011 at $12. As a profitable airline, Spirit is a rarity. I'm also intrigued by Midwest supermarket chain Roundy's (RNDY), which debuted in February at $8.50. I'm also keeping an eye on Dunkin Donuts (DNKN) (July IPO at $19), which is expensive at current levels but remains a great business.

-- Written by Jonathan Heller, president of KEJ Financial Advisors and a contributor to TheStreet and Real Money. As of publication, he had no positions in the stocks mentioned.
At the time of publication, Heller had no positions in the stocks mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.
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