News Column

Is Facebook a Good Investment?

May 16, 2012

Brandon Bailey and Patrick May

Facebook

How does Facebook stack up as an investment? A number of stock analysts are predicting a bright future for the social networking giant, but they also warn of significant risks along the way.

By one standard measure, Facebook's anticipated public offering will be priced far above other high-flying tech stocks, at a level that's prompted some naysayers to wonder if the stock is already overinflated.

Using the $36 midpoint of Facebook's expected IPO price range, and the company's reported $1 billion in net income for 2011, Facebook would have a price-to-earnings ratio of at least 55 for the calendar year 2011.

That suggests a very high expectation for future profits. A comparable estimate of Google's (GOOG) price-to-earnings ratio would be 17, according to a May 7 report by Susquehanna Financial Group analyst Herman Leung, while the median for a group of smaller, faster-growing social-networking companies is 30.

But Leung also projected that Facebook's annual revenue -- reported at $3.7 billion last year -- will grow by 40 percent in 2012 and a further 33 percent in 2013. Other analysts have been equally bullish.

Wedbush analyst Michael Pachter expects the stock to outperform its peers and reach a target price of $44 in

the next year. Sterne Agee analyst Arvind Bhatia set a target of $46 and told clients that, "just like Google did less than a decade ago, we believe Facebook is disrupting the worldwide advertising market."

But analysts are also warning of several risks to Facebook's business, including a slowing rate of growth in the number of visitors -- as the company reaches a saturation point among Internet users -- and the growing number of people who use Facebook on mobile devices, where the company has not yet developed an extensive advertising business.

Facebook is also likely to face increased competition from well-funded rivals and increased scrutiny from government regulators who will be watching to see if the company violates privacy or antitrust rules, according to Pachter.

Small investors, in particular, "need to understand this is in some ways a risky company," warned Charles Rotblut, of the nonprofit American Association of Individual Investors. "They're not going to go bankrupt, but they're at a very high valuation, and they have a CEO with very little experience running a public company."

On the other hand, well-known tech enthusiast and Apple (AAPL) co-founder Steve Wozniak told an Australian interviewer that he thinks the company is a moneymaker. "I would invest in Facebook," Wozniak said this week. "I don't care what the opening price is."



Facebook's high stock price

Depending on different assumptions and variables, Facebook's 2011 price-to-earnings ratio, a common measure of a stock's potential value, may be 55 or higher. By comparison, according to Susquehanna Financial Group, Google's price-to-earnings ratio for 2011 was 17. The median price-to-earnings ratio for a group of smaller, fast-growing online companies was 30.



Source: (c)2012 the San Jose Mercury News (San Jose, Calif.)


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