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Analysis?
George Kesarios
What I Would Pay For Facebook
Oct. 29, 2015 4: 17 PM • FB
Summary
Facebook is probably the biggest bubble among large cap stocks today.In my 30 years in the markets, I have yet to see any stock able to continue on the trajectory Facebook is today.As such, the best case scenario for current long-term stockholders is to underperform for the next decade. The worst scenario is a 75% drop in the stock.
Continuing the series of articles of what I would be wiling to pay for certain high-flying stocks, today it'sFacebook's ( NASDAQ: FB) turn.
Now I can't say I have researched the matter 100%, but in the large market cap category of over$5 billion, FB in my mind, is by far the biggest bubble out there. In fact, it might just be the biggest bubble there ever was in the large cap category.
First of all, FB today has a market cap of about$290 billion. And why is this extraordinary? Because for the current year ending December 31, 2015, analysts expectFB to book about$17 billion in revenues, and$23 billion for 2016.
Let me repeat, FB will book$17 billion this year and its market cap is hovering around$290 billion. Doesn't anyone find anything wrong with that? I guess not. Investors and analysts are all recommending FB's stock as if it's the cheapest on the planet.
So investors don't find anything strange for a stock to be trading at a price/sales ratio of 17 for this year, and 13 times for 2016. How about the fact that the trailing P/E of FB is about 100, and the future 12-month forward P/E, ending December 2016, is almost 40?
Yes, I know what you are going to tell me, FB is not an ordinary stock. We have to take into consideration that the whole planet uses FB right?
Well, I have heard these arguments before many times over, in many different forms. As as far as I'm concerned, these arguments in the long run always prove wrong.
As Mark Twain said, History doesn't repeat itself, but it does rhyme.
( click to enlarge)?
If you didn't realize it, the chart above is Microsoft( NASDAQ: MSFT) . It too is one of the most iconic companies on the planet, it too is responsible for revolutionizing the world, it too is in almost 90% of the world's computers, and it too was the talk of the town as FB is today 15 years ago. Guess what, the talk of the town will not make you money.
So are there a set of parameters that tell us why FB is a bubble today, just as MSFT was back in 2000? Yes there are.
Bubble exhibit number 1:
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Just like MSFT back in 2000, FB today trades at a bubbly 20 times revenue. While it has not reached MSFT's 30 multiple yet, it might, with everyone patting themselves on the back thinking they bought the best stock on the planet.
Please take notice that MSFT today trades at a down to earth 4.8 times revenue. Also mind you, it has many times the revenue and cash on hand it had back in 2000.
Bubble exhibit number 2:
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At the height of its bubble days, MSFT had a P/E of 75. Today, FB has a trailing P/E of about 100. Please note that at the height of Japanese market bubble, the Nikkei had a P/E of 100. Almost 25 years later, the index is still 50% from its highs.
It's never different his time
One of the arguments I hear again and again is that it's different this time. From my experience it's never different. The only difference is investors and analysts find different ways to explain why certain stocks are so expensive, by reinventing how they value investments, thinking they reinvented the investment wheel.
I am amazed that when Pandora ( NYSE: P) was trading at$40 a share, no one brought up the issue of valuation. I was amazed that article after article and analyst after analyst had nothing but praise for the company and management, but did not notice what they were paying for growth.
And if you think MSFT's chart above is bad, I have two more ugly charts for you.
( click to enlarge)?
( click to enlarge)?
That's right, for those of you who have not looked at these charts from 2000, that's what they look like. See, you could have made money in both Cisco( NASDAQ: CSCO) and Intel ( NASDAQ: INTC), it just depends where you bought them.
If you were the buy and hold type in either of these stocks, even if you did not buy above$34 a share, chances are that you are either losing money today or severely underperforming at best.
How to play Facebook
I know what you are going to tell me: I have owned FB for a long time now and it's done great for me, why should I sell it? . My answer is god bless you and more power to you. However, please don't make the mistake of thinking that you made good money in FB because you are such a smart investor. If you want to know why you made good money, it's because you have been lucky( so far) .
And because a bubble can remain a bubble longer than we can remain solvent, I am not telling you to sell or short FB as of right now. What I am telling you is to keep the charts of MSFT, CSCO and INTC I showed you in mind. Because if you want my opinion, FB is going to have a similar fate.
I do not know how high FB will reach before it crashes, or what will make investors and analysts change their stance on the stock, deciding they are paying too much.
That said, I would be more apt to short FB than go long. Short only when you see technical weakness on the charts on a weekly scale.
Another good way to play it is to short FB before an earnings announcement. If it goes up you could cover at a modest loss, but if something happens and earnings are not what the market expected, watch out below because it will get ugly.
Under no circumstances do I consider FB a long-term investment at these valuations. Even if you do not choose to short, go long only for trading purposes for short periods of time.
So what would I be willing to pay for Facebook?
According to analysts, FB is projected to grow 38% this year( 2015), 35% next year and about 28% on average over the next 5 years.
My rule of thumb is that I am willing to pay up to 5X revenue for a stock that will grow up top 50% per year. In FB's case, I would be willing to pay 3-4 times revenue, based on the fact that analysts think it will grow on average 30% over the next 5 years.
And giving a benefit of a doubt to FB's stock, let's say I am willing to pay 4X revenue. FB's projected revenue for 2015 is$17 billion and$23.4 billion for 2016. Based on this, I would be willing to pay a market cap of$68 billion today, or$93 billion at the end of 2016.
If we divide FB's market cap by today's number of shares( 2.26 billion shares), then I would be willing to pay around$30 a share today, or around$41 a share leading to 2016( sounds crazy right?).
Now the reason why these are the prices I would want to pay, is because I believe that at today's prices I will not make any money holding FB for the long term. At best, I think investors who buy the stock today will underperform the market for years to come. The worst case scenario is that FB corrects down to my buy target prices.
Am I being too greedy? Is this wishful thinking? Perhaps. However financial history has taught us that it's rarely different this time. And looking back into financial history, and the faith some investors had in stocks that were totally out of line with valuation reality, I think the risk of owning Facebook at these levels is simply too high.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it( other than from Seeking Alpha) . I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not currently not short Facebook, However I will be short when I get confirmation of technical weakness on a weekly scale
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