Facebook Inc. (FB:US)’s stock, which has already lost $25 billion in value since its public debut, would have to drop another 20 percent for its valuation to match other companies that do business over the Internet.
Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data (FB:US) compiled by Bloomberg show. The stock would have to dive to $23.07 to match the average price-to-earnings ratio for the Nasdaq Internet Index based on estimated earnings in the next 12 months, according to the data.
Investors have pummeled shares of Facebook since its initial public offering, citing concern over growth prospects for the largest social-networking service. Shareholders filed lawsuits that said the company and its underwriters overpriced Facebook at $38 a share. The IPO gave Facebook a higher multiple than 99 percent of the Standard Poor’s 500 Index.
“It could fall quite significantly because it was priced at a significant premium,” Sameet Sinha, an analyst at B. Riley & Co., said in a telephone interview yesterday. “Such stocks -- when they go out of favor -- tend to fall before stabilizing.”
Facebook fell 2.3 percent to $28.19 at the close in New York. Earlier today, the shares dipped as low as $27.86 in intraday trading, below the low end of the price range initially proposed for the IPO.
Facebook, based in Menlo Park, California, makes most of its revenue from advertising targeted to members who access the site on computers. The company didn’t introduce a service for ads aimed at mobile users until March.
“We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven,” the company said in a regulatory filing earlier this month.
The company said this month that advertising growth isn’t keeping pace with gains in daily users, and in April reported first-quarter profit fell 12 percent as sales growth slowed and marketing costs more than doubled.
Based on a trailing earnings of $974 million, Facebook trades at a price-to-earnings multiple of 81 times. The Nasdaq Internet Index (QNET), whose members include Amazon.com Inc. (AMZN:US), Google Inc. (GOOG:US), EBay Inc. and Yahoo! Inc., has a ratio of 35.4 times profit in the past year and 23.5 times projected earnings.
Bullish investors are speculating that surging demand for social-media stock, coupled with earnings growth faster than analysts’ estimates (FB:US), will justify Facebook’s valuation.
“This a company that’s growing and changing rapidly,” Arvind Bhatia, a Dallas-based analyst at Sterne Agee & Leach Inc., said in an interview yesterday. He has a buy rating (FB:US) on the stock and a one-year price estimate of $46. “Google looked expensive for a long, long time. That’s what happens with companies that are changing and disrupting industries.”
The pace of Google’s yearly profit growth has averaged 73 percent since its IPO in 2004, according to data compiled by Bloomberg. While the company’s trailing 12-month multiple (GOOG:US) has slumped more than 70 percent since its 2004 debut, shares of Google have surged 599 percent from its IPO price through yesterday, the data show.
Bhatia’s price target is based on 30 times estimated earnings before interest, taxes, depreciation and amortization of $3.9 billion in 2014. He said Facebook is cheap relative to companies like LinkedIn Corp. (LNKD:US), which surged 109 percent in its first day on May 2011 and trades at a valuation more than 5 times higher than the Nasdaq Internet Index’s multiple, based on estimated profit in the next year.
“It’s a botched deal but the company hasn’t really changed,” Bhatia said, referring to Facebook. “Had these guys come out public in that initial price range, it would’ve been considered a big success.”
Facebook’s price-to-earnings growth ratio is 1.3 based on an annual growth rate of 48 percent for profit through 2013 compared with 2010 earnings, according to data compiled by Bloomberg. That compares to the S&P 500’s so-called PEG ratio of 1.1. The PEG ratio, an indicator popularized by Fidelity Investments’ Peter Lynch, is found by dividing the price- earnings multiple by estimates for profit growth.
The Mountain View, California-based professional networking website LinkedIn has a PEG ratio of 7.3 based on profit in 2010 and the projection for 2013, according to data compiled by Bloomberg.
At the time of its IPO, underwriters led by Morgan Stanley set a price that valued Facebook at 107 times reported earnings in the last 12 months, more than every S&P 500 stock except Seattle-based Amazon.com and Equity Residential, a real estate investment trust in Chicago. The valuation made Facebook, co- founded in 2004 by Harvard University student Mark Zuckerberg, the largest technology IPO of all time.
The company and Morgan Stanley have faced criticism for increasing the number of shares to sell by 25 percent to 421.2 million days before the offering and pushing the asking price to $34 to $38 from $28 to $35.
Facebook increased less than 1 percent to $38.23 on May 18 in a day marred by delays, cancellations and mishandled orders. Robert Greifeld, the chief executive officer of New York-based Nasdaq OMX Group Inc. (NDAQ:US), said a “poor design” in software driving IPO auctions caused the mishaps.
The company, while having long-term potential, has been hampered by some investors getting more shares than expected, said Ryan Jacob, chief investment officer at Jacob Asset Management. Also, investors may be concerned about shares that will become available for trading after a so-called lock-up period ends, he said.
“It will find a floor,” he said. “Fundamentally, I think there’s a lot of optimism. But there are these near-term issues that the stock has to get past.”
To contact the reporters on this story: Inyoung Hwang in New York at firstname.lastname@example.org; Brian Womack in San Francisco at email@example.com
To contact the editors responsible for this story: Tom Giles at firstname.lastname@example.org; Nick Baker at email@example.com