Facebook officially goes public tomorrow, with an initial price of $38 per share. That price has largely been set due to initial demand and absolutely nothing to do with any form of rational thinking.
Yes, there are going to be some very wealthy people tomorrow both on paper and in their pockets. Those that are wealthy on paper are those that have a lot of Facebook shares and those that have their pockets overflowing with money are those that sell some or all of their shares tomorrow.
Here is the problem. Facebook pulled in only about $1 billion in revenue last year. That is no number to sneeze at, but with their IPO price of $38 per share, that values the company at about $104 billion dollars. Is their P/E ratio really worth being at 104?
Google's P/E ratio is 18.9. Apple's is 12.9. Even non-tech giants Johnson & Johnson and General Electric hang out at 17.4 and 15.3 respectfully. Sure, those companies have been public companies for much longer, and have even had significantly higher P/E ratios then they do now (especially Google and Apple).
So yes, Facebook's stock price will probably even rise tomorrow and perhaps into the next week as people trip over themselves just to get a piece of the action.
But the price will fall. It has to. Unless Facebook comes up with an amazing new revenue stream over the next several quarters. Once the P/E comes under 25 or so, it would be worth looking into owning.
That is, unless the company is one of so many other tech companies who were the hottest thing going and is no more - and is beginning to be passed by some new kid on the block.
Come tomorrow, take a pass on Facebook. Wait until their revenues come up, or the stock price falls then jump in. One or both of those will happen, and that, you can take to the bank.
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