Facebook which has been the talk of the town for the last month due to its massive IPO size and its brandname seems destined to sell off from its IPO level. The reason is quite obvious . The company is valued at more than $100 billion despite having $1 billion in profits giving it a P/E of more than 100. Its business model of generating Google like profits from its ubiquitous platform is yet to be proved and still it is one of the most valued companies on the planet.
There is no disputing the fact of Facebook dominance in social media but its model of making money is far from proved to give it such a huge market value . The underwriters of the company are said to have massive amounts of shares worth billions which they have bought to hold the company’s stock price above the IPO price of $38. The trading was marked by a number of glitches which is now being investigated by SEC. This has become a regular occurance reducing trust in the US capital market systems . A lot of the future earnings power is already built into the stock price of the company at $100 billion. It will take a lot of effort to get to the earnings level to justify the market price . In the fast changing technology landscape that is a huge risk . 3 years ago nobody would have questioned the dominance of Nokia and RIMM in the mobile space . But now these companies are fighting for survival. Stock picking is a game of probabilities and in the case of Facebook the current stock price does not justify the risk in buying it.
Brian Wieser, an analyst at Pivotal Research Group in New York, told The Sunday Telegraph that Facebook’s shares were implausibly priced for “perfection” as he cautioned clients against buying shares in the company.
His bearish recommendation came less than 24 hours after Facebook’s stuttering debut, marred in part by technical difficulties, which saw its shares end the day just 23 cents higher than its float price, at $38.23, valuing the company at $104.2bn.
The lacklustre first day performance came in spite of Facebook’s shares opening at $42.05 on Friday morning, and surging as high as $45 at one stage.
Company filings after the market closed on Friday night however revealed the extent to which the banks who led Facebook’s initial public offering – in which $16bn of shares were sold to new investors – were forced to move in to the market and buy shares in order to keep the price above the $38 level. Morgan Stanley, Facebook’s lead financial adviser, ended the day with 162m shares, worth $6.16bn. Other banks including JP Morgan and Goldman Sachs also bought shares, ending the day with $3.2bn and $2.4bn holdings respectively.