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Facebook: Going All In At $25

NEW YORK (TheStreet) -- Wall Street enjoys nothing more than giving off the impression it's got things all figured out when in actuality it doesn't. In the investment world, the most important aspect of due diligence is acquiring an understanding of why stock valuations have arrived not only to where they are, but more importantly, where they are likely to go -- a skill set those on Wall Street love to proclaim can't be found anywhere else, remarkably, even when they've botched it.

The recent IPO of social network giant Facebook (FB) continues to stir more than its share of controversy for no reason other than what has been an unimpressive (if not a pathetic) showing of the larger-than-life event it was built up to be. Investors caught holding the bag are not only angry but demanding answers that these same Wall Street experts are now unable to provide.

The fact of the matter is, these answers were provided almost 30 days ago in the lead-up to the IPO. As often is the case, investors chose not to listen.

The prevailing question is, what's next?

Whenever a sure thing fails to deliver, lawsuits are certain to follow. Answers that cannot be given on Wall Street are certain to be extracted through litigation -- it's the American way and yet another example of the perverse human characteristic that likes to make easy things difficult. Investors once happy at the chance of risking money on stock turn quickly into victims when the word "risk" became a reality, blaming among others Morgan Stanley (MS) and Nasdaq for not only mishandling the offering but for appearing unprepared to service investor demand of its own buildup.

I once said Facebook's stock had no business being compared to Apple (AAPL), Google (GOOG) or Amazon (AMZN) from the standpoint of its $100 billion pre-IPO valuation absent a sound fundamental business to sustain growth expectations. It even offended me to think it deserved to have a market cap higher than tech bellwether Cisco (CSCO). As the stock continues to drop, though, it will begin to approach a level where its price-to-earnings ratio can offer a glimpse of where it might become fairly valued.

For me, that price continues to be $25, and I suspect this is where its bottom might be met over the next several weeks (this is not to be mistaken for some magic formula). On the heels of learning that Facebook's estimates were allegedly lowered by Morgan Stanley a week ahead of the first day of trading, I began doing some comparative analysis. But the challenge was, how do you compare a company such as Facebook that has no peer, one that will continue to remain a speculative play at best?

To that end, I sought to take a compilation of "Facebook-like" companies and use their earnings, FCF, their pre-IPO growth trends as well as their post-IPO performances compared with the overall growth projections within the market of what they actually sell -- which is advertisements. My subjects within the model included names such as Zynga (ZNGA), LinkedIn (LNKD), Pandora (P) as well as Groupon (GRPN).

In these companies, I've extracted data from IPO opening prices and their settling ranges while tracking that data over a period of six to 12 months. These figures served as a gauge and suggested $25 is where Facebook will eventually settle, absent the hysteria, with a chance at serving as near-term bottom before it starts to trend higher. But I suspect it will remain under its IPO price for the balance of this year -- until it can prove it can monetize its platform more effectively. Included in these equations were some "safe" assumptions such as the company's ability to expand in China, Russia, Germany as well as a few other global destinations.

Bottom line
As Wall Street continues to sort out this mess and figure out whose job is it to clean up, you can read this piece for a more comprehensive look at some of the historical data of some recent IPOs to help answer the all-important question: What is social media worth?

While it is not an exact science, $25 seems to be fair value and where I have placed my buy order. With the stock closing at $31.91 on Friday, Facebook's market cap sat at $87 billion -- $13 billion less than that magical $100 million it was projected to be and 16% below its IPO price of $38. Remarkably for a once promising sure thing, it remains expensive absent what is certain to be more downward pressure to the extent of an additional 20%.

At the time of publication, the author was long AAPL, CSCO and held no positions in any of the stocks mentioned, although positions may change at any time.

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