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Facebook might be bargain one day -- but not now

By: Staff Writer

Posted: 05/23/2012 1:00 AM | Comments: 0

NEW YORK -- If you were thinking about buying shares of Facebook last week, when it went public at a price of US$38, you might be tempted now that the stock has fallen $7 in two days.

But forget the dramatic drop. Investors should focus on the only question that matters: How much money will Facebook earn over the next several years, and is that enough to justify its market value right now?

The conclusion is tough to escape: Facebook might be a bargain someday, but not now. Though it's a rough guide, one way to value a stock such as Facebook is to divide its price by its annual per-share earnings. The result is the price-to-earnings ratio. A higher ratio suggests a stock is expensive, and lower suggests it is cheap.

When Facebook set its offering price at $38, the ratio was high -- more than 100 times its per-share earnings last year. It's still high, at 85 times earnings per share, even after a two-day drubbing left it at $31 a share.

The Nasdaq composite index of technology stocks trades at 15.7 times last year's earnings, according to FactSet, a provider of financial data. Apple trades at 13.6 times and Google 18.2 times.

Of course, investing isn't as simple as price-to-earnings ratios. Some companies grow their earnings faster than others, turning a high ratio -- and a seemingly expensive stock -- into a low ratio and a cheaper stock. If you just looked at Facebook's earnings growth last year, an impressive 65 per cent, you'd think it's just such a company.

If Facebook can keep up that pace, its $1 billion in earnings last year will be $7.4 billion in 2015. That would be enough to bring Facebook's ratio more in line with Apple's.

But that's with the stock not rising from $31. If you assume the stock rises 10 per cent a year, you have to add nearly another year to that period.

Then there is the problem with assuming Facebook can maintain torrid earnings growth. One reason Apple is trading at just 13.6 times earnings is investors don't think it can maintain its 85 per cent growth rate.

Among 10 analysts surveyed by FactSet, projections for Facebook's earnings for next year range from $333 million to $1.7 billion. Facebook reported $3.7 billion in revenue for last year. The average projections for this year is $5.1 billion.

Analyst Brian Wieser estimated earnings will slow, and they will be only $3.6 billion in 2015 -- half of what they would be if Facebook maintained its growth rate.

-- The Associated Press

Morgan Stanley probed

BOSTON -- Massachusetts' top securities regulator has subpoenaed Morgan Stanley related to allegations it gave some clients negative information about Facebook before last week's initial public offering.

Secretary of the Commonwealth William Galvin said his office is investigating whether Morgan Stanley divulged to some clients its analyst had cut his revenue estimate for Facebook.

The analyst's revision followed an amended filing by Facebook in which the company said a shift by many Facebook users toward mobile devices might limit its revenue growth.

-- The Associated Press

Republished from the Winnipeg Free Press print edition May 23, 2012 B5

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