Feels like everyone is investing in Facebook…except me

avatar By: IS
Date posted: 05.10.2011 (5:00 am) | Write a Comment  (4 Comments)

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Facebook has been the hottest property in tech for a while now. Sure, I’ve been able to participate in trades on Apple (AAPL), Microsoft (MSFT) and other big and hot names. But that is not where the real action is going on. If you did see the movie “Social Network”, you will remember the sentence spoken by Justin Timberlake (playing Sean Parker):

“A million dollars isn’t cool. You know what’s cool? A billion dollars”

The fact is that he seems to have been right about Facebook, its potential and how important the social network has been for the internet in general. I have been talking about Facebook for some time now, have described what I would do if I were Mark Zuckerberg for a year and have been raving about the greatest opportunity of our investing lifetime, being a Facebook shareholder. The problem of course lies in the fact that Facebook is not a public company meaning only venture capitals that invested seed money can profit from the incredible growth right? Not exactly

Feels like everyone else is invited to the party

Thanks to secondary markets, it’s been much easier for high net worth individuals to get involved and when Goldman Sachs bought a stake both for itself and its clients, I took it personal. Honestly, I love the process of these secondary markets as they make it much easier for these smaller companies to keep their employees happy, provide more accurate valuations and more transparency. That being said, sometimes it feels like everyone who truly wants to get in on Facebook stock has already done so.

I want to buy Facebook stock

Some have said that at this point, Facebook’s valuation has become a bubble, that having a company like this trading at $60-70B is insane. That is crazy. No matter if there will be a 2.0 dot com crash, I still think Facebook is a bargain. According to a recent Wall Street Journal article, Facebook is  on pace to earn over $2 billion in earnings before tax this year. How fast are things improving? Revenues this year are expected to come in at over $4 billion, more than double last year’s $1.86 number, that is growth of over 100% for both revenues and profits with no slowing down in the horizon.

So just how much is it worth?

If companies like Amazon (AMZN) and Baidu (BIDU) are currently trading at P/E ratios between 40 and 50, I think it’s fair to say that Facebook should trade at a significantly higher ratio. How much? I would imagine between 75 and 100 at its current growth which would put the company somewhere between $150-200B. That is significantly higher than where it’s currently trading and I would thus put Facebook as a strong buy. It is growing fast now but could enter into so many new different activities to keep or even increase its top and bottom line growth.

My Big problem

Of course, my big problem lies in the fact that buying shares that are 50% undervalued is not possible for me right now. I truly hope that Zuckerberg will take his company public soon (even though I probably would not if i were him) because eventually all investors will see the same thing that i see, a great company trading at a big discount….

Disclosure: Unfortunately, none to declare:)

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4 Comments

  1. Comment by Andrew — May 10, 2011 @ 8:18 am
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    In my view the next tech crash will involve social media companies as they are highly overbought, especially certain Chinese names. Facebook will not be growing revenues or eps at 100% for an extended period because eventually it will hit a growth wall where user acquisition will taper down. I would rather invest in APPL or GOOG any day if Facebook had a 75-100 P/E.

  2. Comment by IS — May 10, 2011 @ 7:30 pm
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    @Andrew – Which one specifically would you say is overbought right now? I agree, Facebook will not grow at 100% yearly for years…but if it does so for 2-3 years, it would still probably be at a 50 P/E or so… right? 2 Billion right now so 8 billion of earnings 2 years from now.. P/E of 50 = $400B… It won’t be that high, but I think Facebook is a bargain right now.

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  4. Comment by Doable Finance — May 19, 2011 @ 7:47 pm
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    It’s definitely a myth that everybody is buying into Facebook. I am not.

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