Is Facebook worth the bet? Doubts amid the frenzy

Advertisement
By Agence France-Presse | Updated: 5 June 2012 11:40 IST
Highlights
  • Is Facebook worth investing in at its elevated initial public offering price?
Everyone knows it is a giant of the Internet that will make money for a long while. But is Facebook worth investing in at its elevated initial public offering price?

Analysts have some doubts: the company has huge value, and could be very worthwhile over the long term. But there might be cheaper opportunities elsewhere on the market.

On the other hand, demand for Facebook shares is so strong that, fundamental valuations aside, an investor might score big in any case.

For one, there is last year's big social networking IPO, LinkedIn. Those who risked buying its shares at the seemingly expensive $45 issue price would have more than doubled their money by now.

Facebook is confident of the demand. On Tuesday pushed up the price of its IPO, expected to take place Friday, to $34-$38 a share, from the previously proposed $28-$35 range.

That is fairly high, by fundamental valuations, analysts say. At the current pace of growth, the company's price-earnings ratio would be more than 60 times this year's projected earnings and 40 times next year's.

That compares with an current Nasdaq average market p/e ratio of 19.7 times, and rival online ad giant Google's 18.5 times.

Moreover, the company's first quarter report showed slowing ad growth, rising costs, and the company was struggling to find ways to make money on customers who were using their smartphones more and more for their Facebook postings.

"It's really highly likely the company is overvalued... our fair value is $32," said Rick Summer of Morningstar.

The issue price has been driven by the sheer frenzy of demand, he said. "This is the one Internet company that people feel they have to get a piece of."

"Sometimes the expectations get ahead of the fundamentals," said the more bearish Trip Chowdhry of Global Equities Research.

"Revenue per user... is very low (and) Facebook doesn't have a strong mobile story," he said.

The issue, said Chowdhry, is whether one believes the huge long-term promise that Facebook will keep a lock on users and their personal data that advertisers so sorely want, to keep it shoulder to shoulder with better-established Google in the online ads business.

"Is it a fad or is it a trend?" Chowdhry asked. "The industry is not defined, the business model is not defined, the user behavior is not fixed."

Chowdhry says the company's financial performance might not justify the IPO price for several years. Revenues will grow quickly from online ads, but not earnings.

Facebook has to keep making huge investments -- in staff, technology, facilities, and strategic moves like the $1 billion takeover of photo-sharing service Instagram.

Yet longer term analysts are mostly bullish. They say Facebook's potential lies in its potential to increase its revenues very fast.

"If Facebook can actually have that reach into a billion users across the globe, that becomes an extremely valuable advertising platform," said Summer.

"Over the longer term we see Internet ad space is largely a two-headed monster": Google and Facebook.

The question for small investors, though, is whether Facebook's shares will perform. Against the example of LinkedIn are Zynga and Groupon, tech-industry IPOs of the past year which both are now trading well below their issue prices.

Virginie Lazes of Bryan Garnier & Co. says that even if the valuation is a little high, she expects the Facebook price will hold up.

Over one year, she said, "I think it could go up 5-10 percent. That is already good" for a company so large.

Given the choice, however, Summer said that Google looks like a better bet.

"The valuation differential is way too much" between Google and much younger Facebook.

Google's share price was at $611 Tuesday, and Morningstar has put a valuation on it of $780.

Get your daily dose of tech news, reviews, and insights, in under 80 characters on Gadgets 360 Turbo. Connect with fellow tech lovers on our Forum. Follow us on X, Facebook, WhatsApp, Threads and Google News for instant updates. Catch all the action on our YouTube channel.

Further reading: Facebook, Google, LinkedIn, NASDAQ 100
Advertisement

Related Stories

Popular Mobile Brands
  1. Flipkart Buy Buy 2025 Sale With Discounts on iPhone 16 Begins on This Date
  2. Apple Watch's Hypertension Notifications Feature Comes to India
  3. Realme Watch 5 Launched in India With Up to 16-Day Battery Life: See Price
  4. Realme P4x 5G Launched in India With 7,000mAh Battery: See Price, Features
  5. You Can Now Create AI Agents for Automation in Google Workspace Apps
  6. Flipkart Buy Buy 2025 Sale: Nothing Phone 3, Phone 3a Deals Revealed
  7. Xiaomi 17 Ultra Could Launch With This Notable Design Change
  8. Motorola Edge 70 India Launch Date Leaked; Might Arrive With Bigger Battery
  9. Pranav Mohanlal's Horror Thriller 'Dies Irae' Streams on OTT Soon
  10. Super Moon and Geminid Meteor Shower 2025 Set to Peak Soon: How to See It
  1. Supermoon and Geminid Meteor Shower 2025 Set to Peak Soon: How to See It
  2. Flipkart Buy Buy 2025 Sale: Nothing Phone 3, Phone 3a, CMF Phone 2 Pro, More to Get Discounts
  3. Poco C85 5G Colourways, Design Revealed Ahead of India Launch: Expected Specifications, Features
  4. Flipkart Buy Buy 2025 Sale Date Announced; Discounts on iPhone 16, Samsung Galaxy S24, and More Expected
  5. Apple’s Design Chief Responsible for Liquid Glass UI Reportedly Departs to Join Meta
  6. Realme Watch 5 Launched in India With 1.97-Inch AMOLED Display, Up to 16-Day Battery Life: Price, Features
  7. Oppo Pad 5 Receives BIS Certification, Suggesting Imminent Launch in India
  8. Global Foldable Shipments Increase in Q3 2025 as Samsung Retains Market Lead: Counterpoint
  9. Xiaomi 17 Ultra Design Spotted in Leaked Image That Hints at Redesigned Rear Camera Module
  10. Netflix Reportedly Sells Spry Fox Back to Founders as Company Shifts Gaming Strategy
Gadgets 360 is available in
Download Our Apps
Available in Hindi
© Copyright Red Pixels Ventures Limited 2025. All rights reserved.