It appears that the initial excitement has faded over the weekend and Facebook Inc (NASDAQ:FB) share price is being hit hard in its second trading day, down 10.73% to $34.13 at 1:05PM EST. While retail based IPO investors seemed eager to want to snap up shares in their favourite social media giant, the realities of what they purchased may be becoming clearer after a weekend of sober refection.
Many investors seem to have woken up Monday with the understanding that Facebook Inc (NASDAQ:FB) really isn’t worth $100 billion. Not today anyway. While the company does have a strong user base and potential growth in markets like China (if censorship restrictions are lifted, possibly a decade or more away), the current revenue and earnings numbers just don’t warrant such a valuation. There are also significant uncertainties around whether the firm can monetize the user base further, or whether mobile and tablet use puts the company’s revenue model under threat.
When looking back at the 2011 numbers, Facebook’s trailing price-to-earnings ratio at the IPO price was about 104:1 (based on 2011 earnings of approximately $0.365/share). This can be compared to Google Inc (NASDAQ:GOOG), which posted $33.00 in earnings in the last twelve months, and is trading at a trailing P/E ratio of 18.62. It is true that Google’s earnings have only grown about 25% over the past three years, and Facebook saw a 67% jump in earnings in the last fiscal year, but these differences don’t justify a 5x multiple of Facebook over Google.
There are actually many arguments that Google Inc (NASDAQ:GOOG) is the better investment, even for growth, with a solid revenue model that is rapidly expanding top line earnings. Google has similar growth prospects in China, for example, where its current penetration is not strong due to government restrictions and censorship. Google is also a more diversified company, whereas Facebook is somewhat of a one trick pony.
If Facebook was to trade at even 2x the P/E ratio of Google, based on growth expectations, we would be looking at a share price of approximately $16.25/share. While it may not be wise to actively short Facebook at this time, due to retail enthusiasm that may not have yet died, there is a strong case for Facebook having a long fall to the floor if investors can’t buy their exponential growth story. However, as always we recommend investors ask their investment advisers about any potential transactions.