BERKO: Face Facebook reality
• Email: malber@adelphia.net
• Address: PO Box 1416, Boca Raton, FL 33429
© 2012 Creators.com
Dear Mr. Berko:
Please give me your opinion on investing in Facebook Inc. I won’t be able to buy the stock on its initial public offering (IPO), but I am thinking of buying it as soon as it begins trading in the open market after the IPO is complete. I will be using a $23,000 CD that is coming due soon to buy this stock.
You might agree that reinvesting this money in 20-year-plus corporate bonds at 4.5 percent or in another CD for five years at 2.2 percent would be a very bad decision if interest rates rise. So my thinking is: Why should I renew my CD at a ridiculous 1 percent when a potential investment in Facebook would probably earn a heck of a lot more?
I know I will pay a much higher price for the stock, which is supposed to come out at $40 a share, but it looks like this stock has limitless growth potential. I don’t mind paying $70 or $80 if you think this is a good long-term investment, and I might be able to double this money in a year. How come you are not on Facebook?
P.E., Detroit
Dear P.E.:
Investors in the pre-issue market are paying upward of $45 a share for Facebook; however, the British bookmakers, who are a great source of usually accurate information, believe the IPO will open between $27 and $36 a share. At that lower price, Facebook will trade at 112 times earnings, with a total market value of more than $700 billion (including unissued shares), or 40 percent larger than Apple Inc. with $100 billion in cash trading at 35 times earnings. If you buy this stock in the aftermarket at $60 or $70, you will be paying more than 200 times earnings, which ascribes a $1.4 trillion valuation to Facebook.
These metrics are not reasonable and suggest an “Alice in Wonderland” logic. There are some folks who believe even $70 is a low valuation, which could be right, and may heaven protect the future if they are. If they are right, then it’s my contention that aftermarket Facebook investors and others of similar pathologies suffer from a primitive satyriasis and an uncontrollable financial nymphomania. Sadly, these people are able to reproduce.
Your comment on Facebook’s “limitless” growth reminds me of Carl Sagan’s musings on a bacterium that reproduces by dividing itself every 15 minutes, which is four doublings an hour and 96 doublings every day. Though a bacterium weighs only a trillionth of a gram, its descendants after a day of wild asexual abandon will collectively weigh as much as a mountain. In a little more than a day and a half, it will weigh as much as the Earth and, in two days, more than the sun. In three days, the entire universe will be composed of bacteria.
Fortunately, this will never happen, because the kind of growth you ascribe to Facebook always bumps into some natural obstacle. Bacteria run out of food or poison each other or are shy about reproducing in public, and then their growth curve flattens like a pool table.
In my opinion, Facebook, Groupon, Yelp, Zynga, etc. are examples of the endemic failure of capitalism in which values have little relationship to earnings. This was recently illustrated when the tech bubble imploded a dozen years ago, when the housing market collapsed in 2007, and when GM, Chrysler and American Airlines were forced into bankruptcy. Investors are caught up in an evangelical greed that disses the time-honored formula of commonly accepted accounting standards.
I am not on Facebook because I don’t have self-image problems, I’m not insecure, I don’t need “gang” approval of my daily behaviors, I have few friends because I place a high personal value on friendship, I enjoy my own company, I enjoy reading books, I’m not intimidated by face-to-face relationships, and I value intelligent conversation. I can’t imagine gaining a single benefit from a Facebook membership.
Trending News
