It sure has been a bad start for Facebook (FB) shares, and there is little reason to believe that the stock is anywhere close to seeing an end to a major downtrend. It's true that the recent market correction hasn't helped, but this initial public offering seemed doomed from the start due to overvaluation and greed. Investors who thought they could make huge gains by flipping the stock appeared willing to buy into this IPO at any price. Facebook and its underwriters were happy to take advantage of a willing market, and the offering price was raised significantly and the amount of shares sold was also increased. It seems that almost everyone who wanted to buy shares was able to do so, and there were very few investors left to sell to after the IPO. After a large drop, many investors might be tempted to go "bargain hunting", but after considering a number of factors, the shares still don't appear to be a bargain.
Here are some reasons why investors who try buying now might just be catching a "falling knife" and will see the stock continue to drift lower.
- Facebook shares are below the $38 IPO price, but that doesn't mean it's a cheap stock. For example, the price to earnings ratio is still way above the average tech stock. With innovative and fast growing tech companies like Apple (AAPL) trading for about 10 times earnings, it's very hard to justify paying around 55 times earnings for Facebook. As the hype and air continues to come out of the bubble-like valuation for Facebook, it's doubtful that investors will continue to pay such a high premium for the stock.
- When comparing the performance of other recent IPO's like Zynga (ZNGA) or Groupon (GRPN), it does not bode well for Facebook. For example, Zynga went public at $10 per share and the stock now trades for about $6. This is a 40% decline, and if Facebook were to have a similar decline, it would put the stock at $22.80. Groupon went public at $20, but it now just trades for $9.69, which has produced losses of about 54%. If Facebook follows the same path, it would put the shares at just $17.48 per share. If you take an average losses of these two IPO's it would put Facebook shares right around $20, which is also likely to be an important psychological level for investors.
- A major risk for investors in recent IPO's is when the "lockup" period expires. Many insiders are typically restricted from selling all their shares for at least 90 to 180 days after the IPO. According to one article, Facebook could see about 286 million additional shares available for sale in about 3 months, and a massive 1.7 billion shares within 6 months. Both Groupon and Zynga shares have seen accelerated declines in the share price as their lockup periods drew near and expired. Facebook is likely to see the same downside pressure when more shares become available for sale. A $20 per share level could become a more reasonable valuation, yet still give the company a premium valuation at about 40 times earnings.
Here are some key points for FB:
- Current share price: $27.72
- The 52 week range is $26.83 to $45
- Earnings estimates for 2012: 54 cents per share
- Earnings estimates for 2013: 65 cents per share
- Annual dividend: none
Here are some key points for ZNGA:
- Current share price: $6.01
- The 52 week range is $5.81 to $15.91
- Earnings estimates for 2012: 27 cents per share
- Earnings estimates for 2013: 37 cents per share
- Annual dividend: none
Here are some key points for GRPN:
- Current share price: $9.69
- The 52 week range is $9.53 to $31.14
- Earnings estimates for 2012: 18 cents per share
- Earnings estimates for 2013: 70 cents per share
- Annual dividend: none
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
