Facebook is one of the worst big stocks out there to own. After increasing by 4.5% today to ~$95 a share it has a market cap of $266 billion dollars. Owning FB stock is equivalent to saying “I think Facebook is worth more than the yearly GDP of Pakistan”. This is insane.
This is a good resource for their stats: http://finviz.com/quote.ashx?t=fb
A few points.
– FB’s price to earnings ratio is 95. This is suicide-nosebleed territory. Maybe for a company with huge growth potential such a ratio could be defensible, for a massive $266 billion market cap, it is totally crazy.
– Their price-to-book is 6:1. A lot of investors will say that this parameter doesn’t matter. But it does. With such high P/E and P/B ratios, there is no safety at all in owning this stock. If someday something doesn’t go well, or if anything happens at all, you are completely vulnerable to a massive downturn. Valuation always matters, especially when everyone says it doesn’t matter.
Actually their P/B ratio is much worse than 6:1. If you look at their balance sheet you will see that, for $42 billion of equity, $18 billion is actually goodwill. This means it’s basically hot air. So their real book value is, at most, little more than half the stated one. Once again, if the Greater Fool Theory ever stops working, this goodwill value is probably worth approximately zero.
– Facebook is investing in all sorts of areas in which they have no core competence. Such as WhatsApp and Virtual Reality devices. This screams of a corporation with lots of cash, lots of ability to raise cash, but precious few ideas. Throwing money at areas outside one’s core competence is unlikely to yield success.
– Just think about their WhatsApp acquisition. They paid $19 billion dollars for a company with no profits, whose entire valuation was goodwill. Those $19 billion dollars were themselves ~10 years’ worth of organic FB profits.
– Some will claim that Facebook has so many users that they ‘must be worth something’. This is like what people in the late 90’s used to say about ‘webpage views replacing profits’. Profits are the ultimate source of equity value. You shouldn’t hand-wave that.
– Insiders are selling aggressively. See the Finviz link above.
– FB is probably not very defensible. Sure they’re a huge network. But huge networks come and go all the time. What happens when FB becomes ‘less cool’ or is threatened by a scrappy upstart? What about this business suggests a permanent moat? It’s the Internet… everything is in a constant state of upheaval. What are the odds that FB shareholders will get their money back through organic profits?
Facebook is surging and shareholders are crowing. But the wary should sell now. Take profits. Get out. Don’t think you can follow momentum and get out at the right time. With the same money, you could buy into a business that actually earns profits. This is one of the most dangerous stocks to own because its share price is so egregiously out of whack.