Warning Signs For Trading Facebook (FB)

I don’t typically dive into the fundamentals when deciding whether to take a trade, and rarely do I post this kind of stuff on SharePlanner. But nonetheless, I felt like it was necessary today, considering we are just a half hour away from its IPO launch and there is more hype behind this stock than any other I’ve ever seen at a launch. 

I’m not diving deep into the financials, but rather showing you how obvious the warnings signs are by simply going to Yahoo Finance (shown below) and looking at the limited financial history that they’ve posted. 

So let’s break it down here.

A) Price/Earnings Ratio (P/E) of 88! – Groupon (GRPN) has a P/E of 18, Google (GOOG) is 19, Apple (AAPL) has one of 13. Right off the bat, that should create some worries about the overvalued nature of FB. 

B & E) Price/Book Ratio of 11 and Book Value of 3.5 – GRPN has similar numbers to Facebook, Apple has a P/B of 4.8, GOOG 3.3 – I keep showing Apple because they are considered the best company stock to own out there from a longer term perspective and is the quintessential company for what a balance sheet should look like. Google – makes most of their money off of ad revenue as does FB so why not include them in conversation. 

C& D) Revenue of $4B and Quarterly Earnings growth (YOY) of -12%. Yes you read that right they have gone down -12% since this time last year – that’s not what I’d consider going in the right direction if you ask me. This is probably the biggest issue when you couple it with their P/E ratio. And this isn’t some start-up company either. They have more active day-to-day users than anyone else in the internet world. McDonalds (MCD) brags about serving over a billion, while Facebook can pull that off in a couple of days. As you can see GOOG and AAPL are much better off from a valuation standpoint and when you compare it to FB, you see that their house really isn’t in order. And it isn’t like we are talking about some new start-up company – FB has been around for a while already, has a huge base of users, but they can’t seem to figure out how to adequately monetize their user base. 

If they ever charge for using Facebook, people will leave in droves a la Netflix (NFLX), and as it stands now, they grossly underperform Google’s click-through rate on ads. 

So, unless I was able to get in at the pre-IPO, I wouldn’t touch this thing today at the open, and if I had shares prior to the open, I’d be selling them as fast as I could once they started trading.