At Long Last, Facebook

The best businesses can be poor investments, if you pay the wrong price. That's worth considering as Facebook readies the most closely watched initial public offering in years—a deal that could value the seven-year-old company at $100 billion.

Facebook has a unique franchise with a great growth outlook. Yet much of its potential already is reflected in the private-share price of around $38. The company is likely to come public at roughly 100 times trailing earnings. That compares with trailing price/earnings multiples of 16 for Google (ticker: GOOG) and Apple (AAPL), two great growth companies with far more cash on their balance sheets

Those bullish on Internet advertising probably ought to consider Google rather than waiting for the Facebook deal, which may not arrive until April or May. Google's stock price is down 8% this year, to $596, following a disappointing fourth-quarter profit, reported last month. And it's off 20% from its 2007 peak of $741, despite a more than doubling in revenue and profit since then.

Google has a dominant business driven by still-robust search advertising that isn't fully appreciated on Wall Street. Apple, which has been growing about as quickly as Facebook, trades at just 10 times forward earnings estimates.

As Google demonstrates, it's tough to sustain hyper-growth, and that's what Facebook's likely price implies. Valuations throughout the technology sector have contracted markedly in recent years, with established giants like Intel (INTC), Microsoft (MSFT) and Cisco Systems (CSCO) trading for around 11 times forward earnings.

One new factor in the technology-IPO game is the increased level of trading activity on private secondary markets like SharesPost, which damps the historic price pop from IPOs by pulling those gains forward into the private market. Facebook has been trading on Shares-Post at around $38 a share.

Source:BARRON'S