With a view to today´s market introduction of hyper hyped Facebook I´d like to point out some simple facts.
In 2011 Facebook earned around one (1) billion USD, corresponding to an EPS of approx 0.40 USD. The introduction price was 38 USD, which initially rose to 43 USD. This implies a valuation around 100 billion USD and a Price/earnings-ratio of approx 100! Normal blue chips have around 10 – 15.
The expectations indicated by this valuation are enormous.
Just to motivate today´s price, the Company needs to earn between 7 and 10 times more within five years.
Today Facebook has about one (1) billion users. If we in the best of scenarios assume this number to be doubled within 5 years, it will still be far away from the figure needed to justify today´s share price. The Company simply requires squeezing considerably more money out of every user, and this raises the biggest question mark. Are people really willing to pay for the services on Facebook?
In addition the new users are expected to come from the third World, and even with its increasing purchasing power it will for the foreseeable future only attain a fraction of that of the western World.
To contribute further skepticism we can ascertain that Facebook operates in a type of business where the structural evolution goes fast. A glimpse at the histories of Yahoo and Myspace gives evidence to that statement. Will Facebook really sustain competition?
Nobody can deny the success of Facebook – but that doesn´t guarantee a successful investment.