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After the IPO: A Strategy for Trading Facebook

By Sean Udall

NEW YORK ( Minyanville) -- Frankly, I'm hoping that there is enough doubt to make Facebook (FB) trade within 10-20% of the initial IPO price for a few minutes.

If it does, I'm a buyer.

Will this happen? Highly doubtful.

So I'm also trying to catch some initial public offering (IPO) shares, but again not holding out a lot of hope. That means I now have a tough decision: What am I willing to pay, and how soon?

The stock is already trading at what amounts to a $120 billion-plus valuation (roughly $35-38/share) and I know I'm willing to pay up to $140 billion. It's easier to talk about Facebook's market valuation versus specific share price. There is no exact science and we won't know until we have firm pricing and a firm number of shares. They just raised the share count by 25% and it's not clear if they raised the value by that amount or just increased the percentage of the total company being offered.

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At $155-170 billion valuation, the decision starts getting a good bit tougher, but I'm probably willing to "try some" for a trade, as I would be playing for a move to the $200 billion range, and around here I would be a seller or certainly setting a trailing stop. Why? Because Google (GOOG), in my view, is a hugely superior asset with a heck of a lot less risk for its $200 billion valuation, roughly $625/share, than Facebook at that same mark.

Google is still growing between 25-30% and has a price-per-sales ratio of just 5x, and that is with more than 20% of the total market capitalization of the stock in net cash. Moreover, a Facebook at $200 billion valuation is no longer at 25x sales, it would come in at 50x sales. Compared to Google, it would be growing at twice the rate, but at 10x the sales multiple. So either Google is massively undervalued (something I believe), or Facebook is radically overvalued.

Bottom line, if I can't catch any Facebook under the $150 billion valuation level, I'll gladly walk and watch the stock. Also, I'll relish Facebook trading at that $150 billion value or higher as I believe it will benefit many of my holdings.

--Written by Sean Udall of Minyanville.

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