Facebook at $40: Wasn't This an Overvalued IPO Dud?


Source: Mashable.

Remember all that hype about Facebook (NASDAQ: FB  ) stock when the social network went public at $38? The valuation was astronomical, critics complained. As the shares continued to fall as low as $17.55 in the coming months, the bears were emboldened. It became commonplace to liken the Facebook euphoria to the dot-com bubble.

But today it's a different story. The stock is back above its IPO price, analysts are excited, and the stock is on a run. What's changed?

Facebook in the summer of 2012: Can Facebook monetize mobile?
Just about a year ago, Forbes writer Eric Savitz pitched in with some expert-sounding investment advice:

[E]ven at $20 and change, the stock is no statistical bargain. ... The problem is that the stock was so outrageously expensive when it went public that the shares STILL look expensive versus almost any other technology company. ... The bottom is out there, but I'm not convinced this is it.

He certainly was right: $20 wasn't the bottom for Facebook stock -- but it was pretty dang close. The stock now trades at more than a 100% premium to its all-time low of $17.55.

But let's give Savitz some credit, as his underlying thesis was based on a legitimate concern. "[W]hat I think we do know is that unless Facebook can do something to improve its growth rate, there seems little obvious reason for it to trade at a gigantic premium to Google," he explained.

Sure enough, Facebook's 2012 second-quarter results certainly weren't indicative of a growth company worthy of its P/E ratio of about 85 at the time. Revenue was up 32% from the year-ago quarter -- nice in isolation, but not when valuation was taken into consideration.

Even more, Facebook's mobile revenue at the time amounted to zero, zip, nada.

In hindsight it seems silly, but investors wondered: If the company makes money from ads on the side of the feed now, how will it ever fit them into a small smartphone display without being obtrusive to the experience?

Of the company's 955 million monthly active users, or MAUs, 543 million were mobile -- and Facebook hadn't figured out how to monetize them. Uncertainty prevailed.

Facebook today: Mobile domination
Eventually investors' long-awaited answer came. Facebook could put ads in the feed itself, giving them the same social characteristics a typical status update has.

It worked. Ads in the feed, a redesigned timeline, and improved ad products helped the company enter a new phase of growth. Facebook was executing swiftly.

Today Facebook has undoubtedly proved that not only can it monetize mobile, but also that it can excel in mobile.

In the second quarter of 2013, mobile MAUs were up 51% from the year-ago quarter. More importantly, mobile advertising revenue accounted for a whopping 41% of total revenue. And the company now looks like a growth stock deserving of its lofty P/E, with overall revenue soaring 53% from the year-ago quarter.

The impressive second-quarter results have investors more confident than ever in the company's future.

Since the results were released, the stock has been soaring.

FB Chart

FB data by YCharts

Facebook tomorrow
The company has certainly proved it can succeed in the modern connected environment. Even more, its strong network effect, bolstered by 699 million daily active users, or DAUs, practically secures the company's position as the go-to social network for years to come.

But unfortunately, price does matter. At 15.8 times sales, or more than three times Google's 5.1 price-to-sales ratio -- the stock isn't something I can make a bullish call on right now.

Sure, I'm far from ending my CAPScall on the stock. But if I bought into it at today's price, it would be a small nibble with expectations for a very volatile ride.

At the same time, the company's powerful network effect and proven ability to monetize mobile give the company the enduring characteristics I'm searching for -- so that "small nibble" sounds pretty tasty right now.

Facebook isn't the only growth stock stunning investors. This incredible tech stock is growing twice as fast as Google and Facebook, and more than three times as fast as Amazon.com and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!


Read/Post Comments (21) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2013, at 8:52 PM, desertracer1 wrote:

    One thing for sure the Motley Fool never writes the same story twice.. actually a little hypocritical if you ask me. And not just Facebook. Kinda like the rest of the so called analysts.

  • Report this Comment On August 26, 2013, at 12:15 PM, rianjones1983 wrote:

    Review their latest Pacific Crest Global Technology Leadership Forum Transcript @ http://stks.co/qPxJ

  • Report this Comment On August 26, 2013, at 5:24 PM, BentMike wrote:

    Desertracer1

    You misunderstand. The 'motley" part of Motley Fool is pretty literal, not hypocritical at all. The Fool is the one person in the king's court that can tell the truth. Truth will always be what you make of it yourself in the realm of investing and economics.

    So MF analysts are allowed to state their opinion without regards to a particular party line. Then we all talk it over. In this case I thought it was a fair enough discussion. Did you have a particular beef with the logic or numbers?

  • Report this Comment On August 26, 2013, at 8:06 PM, xetn wrote:

    Just proves the old adage: a sucker is born every minute.

  • Report this Comment On August 26, 2013, at 9:13 PM, BentMike wrote:

    The SA is very effective, and not very expensive; but, if you do not understand how it is set up, or you do not care to use all the parts of it, it may not be worthwhile. It is not exactly handholding - you need to do some thinking on your own. There is a money back guarantee. Not sure where being a sucker fits into this.

  • Report this Comment On August 26, 2013, at 11:39 PM, seluj100 wrote:

    I am already a subscriber of Motley Fool Stock Advisor and I still get bombarded with promotional literature asking me to join your newsletters.

    I am getting tired of these lengthy promotional presentations which everybody seem to use nowadays and are nothing else but boring teasers to subscribe to some new newsletter.

    In principle, when I subscribe to a newsletter from a company I do not sign for anything else from this company. I do not appreciate that you use your subscribers to draw additional business by holding back some "secrets".

    So please, if you don't have a specific update to my newsletter for me, do not send me these teasers which arrive almost daily and are just a waste of my time.

    I would suggest that you indicate in the subject line of your messages whether the information is an update to my subscribed newsletter or an advertisement for some other product.

    Thank you,

    Jules Bishara

  • Report this Comment On August 27, 2013, at 12:17 AM, marcin97 wrote:

    @seluj100

    Like your post!

  • Report this Comment On August 27, 2013, at 12:23 AM, MeTwit wrote:

    Well, FB has changed since when the stories of an expensive FB were written. Personally I anticipated FB would go into new services like communication packages and retailing of low margin-heavy turnover products, but I was not going to be a gambler. I refused to buy FB on hope of transformation, even when it came to $1.5 within my reservation price. I don't regret anything now that it has hit $40.

  • Report this Comment On August 27, 2013, at 12:39 AM, dgmennie wrote:

    Hi Jules Bishara -- I think itought to be obivious by now that there are NO newsletters that can reliably predict what the future holds for specific investment products. This goes for anything from the most flagrant penny stock promotions to the blizzard of items produced by the Motley Fool and others. The big money (for them, anyway) is selling the newsletters (or courses, or seminars, or whatever) that promise a path to riches.

    Sure, some of these folks told investors to buy Apple or Microsoft or Netflix when the price was cheap. But they also told them to buy a hundred other hot investment products during the same time period. Products that today do not exist or that flopped miserably. Nobody remembers this. And nobody (at the time) could have told you which few of the hundreds of hot picks would actually go on to great success. Same thing holds true today.

    The game is rigged. Joe average investor is there to supply feedstock for the few Wall Street pros who (sometimes) know what they are doing and have the inside info to execute at a profit, and to support an ever-growing universe of programmed trading that makes money every few milliseconds on microtrends that only a computer algorithm can detect.

    "Buy and hold" quality companies? By what measure are they quality (no agreement on a reliable measure here) and by what evidence will they be around long enough to pay you regularly over your retirement? Even great companies crash, burn, hit rough spots, merge, or go under in a 10- to 30-year timeframe. Not good enough. Not by a long shot.

  • Report this Comment On August 27, 2013, at 4:46 AM, floodjo wrote:

    Agree 100% with seluj100 above - I'm also tired of all the videos and teasers which are aimed at new users. And particularly annoying is that they sometimes seem to indicate that we as loyal subscribers are missing out on extras. Maddening! But the core SA, HG output is still very good (which is the only reason to be a member!)

  • Report this Comment On August 27, 2013, at 5:48 AM, wax wrote:

    ...Wasn't This an Overvalued IPO Dud?

    By what standard is not still an overpriced dud, especially at $40?

    Wax

  • Report this Comment On August 27, 2013, at 9:19 AM, TMFNoCeilings wrote:

    Hi dgmennie,

    ' "Buy and hold" quality companies? By what measure are they quality (no agreement on a reliable measure here) and by what evidence will they be around long enough to pay you regularly over your retirement? Even great companies crash, burn, hit rough spots, merge, or go under in a 10- to 30-year timeframe. Not good enough. Not by a long shot. '

    If you’ll indulge me a response: we measure the quality of our recommendations by virtue of the returns they produce—which are, it turns out, exceptional. If you follow the link I’ve pasted below, you’ll find a Wall Street Journal article from earlier this month that proves, through third-party verification, that three of our newsletters (Rule Breakers, Inside Value, and yes, the flagship Stock Advisor) have produced average annual returns more than doubling the market over the last five years.

    You’ll also find evidence of a company-wide excellence that differentiates us sharply from our peers. To wit:

    “Consider this: The three top spots in the Hulbert Financial Digest's five-year rankings through June 30 of more than 200 investment-advisory services all buy and hold quality companies. Remarkably, all three are subscription newsletters published by the same advisory firm, the Motley Fool in Alexandria, Va., which was founded by brothers Tom and David Gardner in 1993.”

    -Mark Hulbert, The Wall Street Journal, 8/2/2013

    So while I’d tend to agree that no newsletter can predict exactly what’s going to happen to a given stock over a given time period (in fact, I’d argue that no HUMAN can reliably do that, since it involves a distinctly extra-human capacity for magic), I have to take issue with your assertion that “the game is rigged”. The Motley Fool has been helping everyday investors beat the market for 20 years now—by operating under the assumption that if you invest in great companies, hold on for the long term, and stomach the losers while letting the winners run, you can reliably grow your wealth without the aid of nary a single “computer algorithm.”

    I think we’ve done a pretty good job. But don’t take my word for it—the numbers speak for themselves.

    http://online.wsj.com/article/SB1000142412788732399700457864...

    Fool On & Up,

    Lyons George

    Research Analyst

    Motley Fool Rule Breakers

  • Report this Comment On August 27, 2013, at 9:57 AM, TMFPhillyDot wrote:

    @seluj100,

    If you would like, you can feel free at any time to call our in-house Member Services Team and ask them to take you off our promotional email list, which will ensure you only get emails from your service. Many members like to see all the various offers we present, because each service is incredibly unique and each has different levels of personalization and complexity. However, I can understand if you no longer want to receive the emails -- so please, feel free to call our Member Services team!

    Thanks,

    Jordan DiPietro

    VP, Premium Membership

  • Report this Comment On August 27, 2013, at 10:16 AM, dsmoyer1 wrote:

    tgmennie, I am curious, where do you invest your money?

  • Report this Comment On August 27, 2013, at 2:09 PM, jomelbb2 wrote:

    why are srocks in promotional e-mais not listed this way in SA reports to subscribers

  • Report this Comment On August 27, 2013, at 8:32 PM, chris293 wrote:

    FB is a result of insider college hype and too nosy

    for me. I like to keep most of information about any me or mine quiet otherwise these companies like FB is going to profit themselves at our expense.

  • Report this Comment On August 28, 2013, at 7:49 AM, ErasmusBDragon wrote:

    I think it is worth a reminder that companies go public in the first place to 1. reward the private investors with liquidity and 2. finance the company for future development. The goal is not to offer the IPO manager and new investors a chance to make a killing on a cheap stock deal. I am not a fan of Facebook, but to the extent that Facebook managment got the maximum benefit for their IPO, I say congratulations on good stewardship of your company!

  • Report this Comment On August 30, 2013, at 4:15 PM, jhumroo22 wrote:

    In total agreement with seluj100. These promos to existing members is a total waste, and a classic bait and switch.

    I expect existing members would be shown the stock being promoted in these promos and not just be subject to a never ending video where the stock is never disclosed without having to subscribe to yet another MF offering.

    I'm very disappointed!

  • Report this Comment On August 30, 2013, at 7:42 PM, TwinMount wrote:

    I agree with Seluj100 as well. I am reasonably happy with my current subs but dislike the promo material being sent.

    As for Facebook, a recent study linked daily use of Facebook with depression. It seems to me to be a significant time waster and consequently a drain on the economy.

  • Report this Comment On August 31, 2013, at 5:27 AM, abirknight wrote:

    @seluj100 Same here!

  • Report this Comment On August 31, 2013, at 3:44 PM, somethingnew wrote:

    When I see Facebook now it makes me think of Apple's valuation when it ipo'd also overhyped at the time then the ensuing 6 years of nothing stock growth because it was so over hyped and over valued from the start. Maybe Facebook has recovered from it's ipo and maybe it will be be a good long term investment 20 years down the road but at 36% growth and a 100 billion dollar valuation it looks to me like nothing just waiting to happen for the next 5 years.

    As for as SA, I think it all depends on how you use the service. It took me years to subscribe to a MF newsletter and SA is the only one I've paid for so far and have had it less than a month. The only thing I wish it had was more detailed analysis of the new recommendations and a more thorough reasoning on how they came to the decision to include it as a pick. I know I probably don't use it the way it's intended in that I mainly just subscribe to it so I can cherry pick ideas from their recommendations then do further analysis on those ideas before I invest completely ignoring the core stocks completely which don't interest me at all. I'm happy with it though and view it as sort of a low cost turbo charged supplement for my own ideas.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2608829, ~/Articles/ArticleHandler.aspx, 12/22/2014 10:02:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement