Is Facebook a Buy Yet?
Three months later, the stock has fallen another 30%. Facebook has taken a 50% haircut since hitting the public markets.
Maybe it's time to reconsider. Is Facebook a buy at these discounted prices?
Many investors would take one look at the P/E ratio and run away, convinced that no company is worth 67 times trailing earnings or 10 times sales. But that's a simplistic knee-jerk reaction based on one of the quickest, but weakest, valuation tools available. The same P/E-centric investors also missed out on Amazon.com (NAS: AMZN) and its terrific growth story, because that stock's P/E ratio rarely dips below 50:
Amazon keeps its earnings low on purpose. This keeps taxes low, while allowing the company to focus its cash use on rapid growth opportunities. I don't see investors complaining about the 1,500% returns this strategy has produced over the last decade. Could Facebook be onto s similar low-profit strategy with a huge long-term payoff?
Word on the Street
Okay, so let's ask the Wall Street crowd. Surely, analysts must have come up with some strong catalysts for Facebook. After all, even the most pessimistic of the herd's 21 target prices sits at $23 per share. That's a very respectable 19% premium to current prices.
But there's no consistent bull story to lean on. Several firms like Facebook's improving revenue muscle. Wells Fargo, for one, sees "multiple avenues for sustained revenue growth in excess of 25-35% for the coming years as advertising dollars shift to online, social ad spend garners more share, platform revenue from payment/commerce increases, and mobile monetization improves."
The top-line growth comes at a price, though. Pivotal Research bases its "buy" rating on strong online ad sales, but notes that operating margins are "weakening" and capital expenses are on the rise. In Pivotal's book, Facebook is "a riskier business profile" than Google (NAS: GOOG) , which the firm sees as Facebook's closest competitor.
But 30% top-line growth and softening margins? That's hardly an Amazon-class story.
Odds and ends
My original discounted cash flow analysis pointed to a $19 price per share, using some very optimistic assumptions. For one, free cash flows would have to grow 36% a year for five years. Instead, Facebook's first quarterly report brought trailing cash flows down by 23%. Let's just say that the $19 price target might be a bit optimistic.
And now, even the company's most ardent supporters are jumping ship.
Facebook's lock-up period just ended, and a boatload of early investors dumped their shares as fast as they could. Director and venture capitalist Peter Thiel sold $400 million worth of shares, reducing his holdings by nearly 80%. I understand that venture firms prefer liquid profits over locked-up capital, but this is hardly a vote of confidence. If Thiel believed in the company he once funded, and still helps out in the boardroom, wouldn't he hold on to those precious shares until they bounce back? That's what some other directors are doing, but they don't have anything like Thiel's stellar track record as investors.
What's new, Fool?
Running through Facebook's updated numbers, and evolving storyline, did nothing to change my opinion of the stock. My thumbs-down CAPScall remains firmly in place, and I'm still not sure if there's any price that might tempt me to go bullish on this stock.
This being the Motley Fool, some of my colleagues are bound to disagree with my grim view. The stock is an active recommendation of our Rule Breakers newsletter, for example. Grab a free 30-day trial to that service to see how Mark Zuckerberg earned that team's trust. Or you could just pick up our brand-new premium report on the stock. Our best analysts will hone their analysis and keep you up to speed with free updates for a full year. Just click here to get started.
The article Is Facebook a Buy Yet? originally appeared on Fool.com.Fool contributorAnders Bylundowns shares in Google but holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Amazon, Google, and Facebook.Motley Fool newsletter serviceshave recommended buying shares of Google, Facebook, and Amazon. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.