Barron’s has dealt a blow to the valuation of Facebook this week printing an article on Monday that claimed the company’s stock may be vogue right now but doesn’t have the long term appeal of tech giants like Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG). The article is one of many in recent weeks that have begun to push back against the intense sepeculation and overvaluation of Facebook’s coming Initial Public Offering.
The offering, which is expected to begin on the eighteenth of this month, has been the most talked about topic in finance in recent weeks, trumping Yahoo Inc. (NASDAQ:YHOO) CEO trouble and Bill Ackman’s proxy war at Canadian Pacific Railway Limited (USA) (NYSE:CP). Everybody saw the high coming as the firm built up to its debut but the huge valuation has still taken many by surprise.
Companies on their IPO are a tricky investment. It takes research and intuition to get a real feel for where a company is going and even with the greatest minds behind an investment things can still go wrong. The current glut of tech companies offering their stock to the public are not Google. Google had already secured its monopoly in what was still a difficult business to get into in 2004. It was still a risky venture then, as any of the injured from the dot com bubble will attest to.
Companies like Groupon Inc (NASDAQ:GRPN) and Zynga Inc (NASDAQ:ZNGA) are working in markets where there is stiff competition. Their business models are difficult to understand as they are the first of their kind. They are still a risky investment. Facebook seems different, but is it really? The firm is competing for advertising space, a market that is certainly growing but is incredibly competitive. They are looking to lock horns with Google the, internet’s current, and for some time legacy, gate keeper. There is potential in their plan but there is also a great deal of risk.
Facebook is to be valued at around $35 on opening day. Barron’s wrote that the firm would need to see a five or six fold increase in revenues to double its value and that is by 2017. Facebook and Google are established businesses. Their models have proven to be consistent and successful in a fast moving tech world. Facebook could be the fastest growing stock in history but the valuations it is looking at make it a huge risk. Don’t follow the crowd into the social networking IPO.