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Is Facebook the Best Play in Social Media Today?

Tamara Rutter
May 31, 2012

There's a good chance you use Facebook (Nasdaq: FB  ) on a regular basis to engage with friends and family, even if you don't own shares of the social network. With 901 million monthly active users, Facebook is an advertiser's dream. The fact that it is free to use has fueled this growth. However, shares of the social network, which began trading on the Nasdaq two weeks ago, carry a steep premium compared with other companies in the industry. For now, I think there are much better plays in the social-media space outside Facebook.

Let's face it
Everything from a shocking acquisition, to the turbulent initial public offering, to concerns over the company's ability to grow revenue have contributed to the stock's price volatility. Shares are down 26% from its $38 IPO price. Unfortunately, I still think the stock is inflated at today's price of about $29 a pop.   

From an investment standpoint, Facebook commands a sky-high P/E relative to industry peers like Apple (Nasdaq: AAPL  ) and Google. To really drive the point home, CNBC dressed up Facebook with multiples from other tech companies to illustrate how the shares would trade at different valuations.   

Facebook's price at comparable P/E ratios


Forward P/E

FB Stock Price

Apple 11.7 $6.30
S&P 500 12.8 $6.90
Google 13.12 $7.15
Zynga (Nasdaq: ZNGA  ) 19.5 $10.55
LinkedIn 128.2 $128.20

Sources: CNBC and S&P Capital IQ.

This is telling, especially for investors who are thinking about buying Facebook on its recent dip. This I wouldn't advise, as I think the stock has farther to fall. It's now clear that much of Facebook's valuation ahead of its offering was based on hype. The social network's IPO uh-oh included technical difficulties at the exchange, as well as a selective disclosure about earnings made by Morgan Stanley ahead of the offering -- keeping small investors out of the loop. Perhaps this wouldn't have been such a big deal had the share price held up. But Facebook isn't the only tech stock to stumble after going public. 

Shares of Zynga currently trade at $5.98 a share, down from their December IPO price of $10. Groupon is in a similar boat, with its stock having lost more than 46% of its value year to date. The daily-deals site lost investor confidence earlier this year after not one, but two