Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Facebook IPO Analysis In Layman's Terms

|Includes: Facebook (FB)
  • This is a post I wrote in May 2012 before the Facebook IPO.
  • My thesis was that the stock was overvalued and that it could be bought at or below $28 a share.
  • I ended up buying a medium-sized position around $22 a share after the stock crashed post-IPO.

Obviously there has been a lot of public (And especially amateur investor) interest in the Facebook (NASDAQ:FB) IPO this Friday and a few of my friends have been asking me whether I am buying any. The answer is no, and here's why:

It's not worth it, at least not right now. Investing in tech IPOs is often a bit of gamble to start with but there is one big reasons why this is a gamble not worth taking.

Valuation. Facebook is just to dang expensive!

While Apple (NASDAQ:AAPL) stock is priced at 13 times earnings (The stock costs 13 times the amount of money they make every year) Facebook stock is going to be selling at 100 times earnings! Another comparison, Google (NASDAQ:GOOG) is valued at approximately 200 billion and made 10 billion in 2011. Facebook is going to be valued at 100 billion and made approximately 1 billion last year. That means for every billion of Google's valuation they made 1/2 a million. In comparison, Facebook only made $100,000 for every billion of its valuation. While it is not fair to compare the P/E ratios of established firms like Google and Apple to an up and comer like Facebook, these figures do give you a basic idea of just how expensive Facebook stock really is.

The funny thing is, all the big players know that their shares are being overvalued and they are going to dump as many shares as possible at the initial high valuation. The average investor doesn't understand what is happening and will likely happily take the shares off their hands at this inflated price.

It's probably more fair to value Facebook at something like 50-75 times earnings (still pretty pricey) because they are quickly growing their revenues every year and should expand massively over the next few years.

So with this basic valuation info in mind, here is my recommendation: Wait until the shares dip to $28 per share, which would indicate a value of 76 billion for the company, and then feel free to pick up a medium size position to hold for a year or so and see how Facebook does at monetizing its user base.

If you are an advanced investor, sell a July or August $28 put, collect some cash up front, and then just sit back and wait.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.