(NVONews.Com) It has happened again. Facebook stock fell over the weekend from over $22 per share to just over $20 representing a drop of about 10%. Given that the company had opened its IPO at around $38 a share, that is a precipitous decline indeed, nearly 47% of its initial value.
Everything considered, this should not come as a great surprise. Even at the time when Facebook was gearing up for its IPO, there were concerns that its valuation, which had little to do with its actual earnings and everything to do with projections, was out of all proportion.
One of the main reason behind the surge, was the fact that Goldman Sachs no less had invested in Facebook – this was before the IPO launch of course back in 2011 – at a valuation of $50 billion. That, and Goldman’s subsequent efforts to give sweet deals to its clients in the form of an opportunity to invest in Facebook, lifted up the company’s stock.
There was also a lot of positive news around the company. It had, and this should still be true, surpassed Google as the most visited site in the US. It had more than 500 million users, and it was on the verge of conquering the world.
No wonder that no one thought to look too closely at the numbers. A disastrous IPO launch and some security and privacy uproar later, the market is now beginning to take a more sober view of Facebook’s prospects.
And that is what has resulted in Facebook’s falling prices. As Andrew Barry of Barron’s pointed out in a report, the P/E ratio is near 46, that is to say, it’s stock price is 46 times its earning, even though even for stellar companies like Apple and Google, the earning ratio hovers around 16. Such a valuation for Facebook is simply unwarranted. He therefore suggests that a price of $15 per share is more logical.
One may also add that Facebook faces a tougher challenge than either Apple or Google. Its only platform is Facebook, and ads its main revenue stream, while both Apple and Google sell are multiplatform, multiple revenue stream companies.
At the very least expect the Facebook price to come down to the same P/E ratio as these two stellar companies.