What's the deal with Facebook's (FB) IPO? It looks like too much hype for just a 23 cent gain over the offering price. The reality is that the company has been priced at an overvalued level.
Facebook's current stock price has a trailing PE ratio of 88.3. This means that the stock is trading at 88.3 times its earnings per share. The average S&P 500 company trades at only 14 times EPS. The average Dow Jones Industrial company trades at only 13 times EPS. The stock price is much too far from its earnings.
I also like to look at Facebook's forward PE ratio of 63.72. This is the price of the stock divided by future earnings per share. This is also too high and reflects an overvaluation. I would be more comfortable with a forward PE ratio slightly above average of say 20, which means the stock price would be only $8.60.
We don't yet have 5 year expected earnings projections, so there is no PEG ratio. However, there is an expected earnings of growth 22.4% for next year. So, we can calculate a one year PEG for Facebook of 3.94. This is also at an overvalued level. I prefer to see PEG ratios under 2, and ideally I like them under one.
Next up is the price to book ratio of 11.01. This wouldn't be terrible if the PE ratio and PEG were closer to average levels. Ideally I would like to see price to book ratios under 3 for undervalued stocks, or at least under 10 with respectable PE and PEG ratios for fairly valued stocks.
Another interesting figure is Facebook's price to sales ratio of 25.76. This is also at a high level. As overvalued as Amazon is, it still has a respectable price to sales ratio of 1.91. Ratios under one would be ideal, but ratios under five are also good. Facebook's ratio of 25.76 just shows too much separation between the stock price and sales.
If Facebook had an average PE ratio of 14, the stock price would be fairly valued at about $6. Or EPS would need to be $2.73 instead of only $0.43 to make the current stock price fairly valued.
The other important factor to consider is the 91 day lock-up period. After this period ends, insiders and other large investors are allowed to sell their shares. Significant selling pressure may be placed on the stock after the lock-up period ends. LinkedIn (LNKD) fell about 30% in the time surrounding its lock-up period, but it has more than made up for those losses with its 2012 gains.
I still think that Facebook has high potential to become a great performing stock. However, it is not currently priced at an attractive level to warrant a purchase at this time.