Business viewpoint: Facebook stock: Great opportunity or herd mentality?
BY JAMES K. "SKIP" NICHOLS Business Viewspoint
Thursday, May 24, 2012
5/24/12 at 7:40 AM
Many of my clients have asked about buying Facebook stock now that it's gone public.
Facebook Inc. provides a compelling story - a Hollywood blockbuster movie, a tech company with spectacular growth, and 900 million users. How could anyone not be tempted by its stock?
My suggestion is to be patient and gather more information before jumping in. My reasoning is based on these facts:
On Wednesday, the shares gained $1 to finish the day at $32 on the Nasdaq Stock Market.
- Facebook's value, as an investment, is based on its advertising revenue. General Motors Co., its third largest advertiser, had been spending about $10 million a year on Facebook ads. But last week GM announced that it has dropped its Facebook advertising because it can't identify a link between the ads and additional auto sales.
- Facebook closed on Monday - the day of its initial public offering - at $38.23, just barely above the opening price of $38. There has been some speculation that the underwriters had to prop up the stock to keep it from falling below its initial offering price.
Perhaps the IPO price was the pinnacle. Is there another hot social media or other tech stock waiting in the wings to catch the fancy of investors? Or is Facebook the next Amazon?
- Many other social media stocks fell sharply after their IPOs, such as Zynga, Pandora and Linkedin. Some of these fell by double digits.
- Facebook will really have to grow in the months and years ahead. As a comparison, Facebook is priced at 108 times earnings while Google Inc. came out at three times earnings.
- Facebook is making about $5 per user, while Google is making $35 per user.
- The revenue per user at Facebook has gone down over the last six months.
That's a debate for another day. In the meantime, investors should be prudent. And take your daddy's advice to buy low and sell high.
James K. "Skip" Nichols is president of Financial Planning Resources in Tulsa.
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