Should You Invest In Facebook?

| About: Facebook (FB)

The much-hyped super-large Facebook (NASDAQ:FB) IPO probably gave the company the largest market cap ever for an initial public offering. However, the IPO failed to take off on the first day. There are many theories regarding this lackluster performance, including blaming the poor price performance on Nasdaq's inability to fulfill orders. On the other hand, there is also talk about the underwriting banks propping up the IPO to the offering price of $38.

The one thing that is missed in most analysis is this: How much money can you make by investing in Facebook? In my opinion, you can hope to triple your money in five years. However, I'd say that the stock is quite likely to stay at it's current price for some time, until the company proves its ability to grow earnings. But I may be wrong (see Amazon (NASDAQ:AMZN)).

Let's look at Facebook from the standpoint of valuation. At $38 a share, Facebook has a market cap of $104 billion and a P/E of about 122 (these numbers vary wildly between websites, so I'm assuming the most often quoted numbers are correct). Let's say you think Facebook can be like Google (NASDAQ:GOOG). Facebook's earnings need to grow 10 times for the stock price to double. Google has approximately $10 billion in net income and a $200 billion market cap. Let's say Facebook can be like Apple (NASDAQ:AAPL) -- that's very unlikely, but let's run the numbers for fun. For the stock price to grow 5 times, earnings need to grow 40 times. Apple has TTM net income of $38 billion and a market cap of $500 billion. The last comparison I'll make is Amazon. I have absolutely no understanding as to why Amazon has such a lofty valuation. It is like investors have gotten trapped in a "reality distortion field." If Facebook were to be valued like Amazon, the stock price should shoot up to $50 very soon.

I'm long a few hundred dollars in Facebook, just for the sake of it. I know it is impossible for the stock to grow tenfold (a trillion-dollar valuation is just silly) -- even fivefold growth is very unlikely, considering the trouble Apple is having maintaining its valuation. But I think a triple in price in five years is possible if Facebook does things right, unlike its past history. That would give Facebook a valuation of $300 billion, which is what I think Google will be valued at in that time frame. I also think that the growth in mobile will be monetized by Facebook, and this is only the beginning. There is promise, but it is risky.

Disclosure: I am long AAPL, GOOG, FB.

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