In [this] column, my colleague, Justin Fritz, revealed the long-term threat that Google+ poses to Facebook, sounding the social media giant’s alarm bells.
Today, I want to breakdown Facebook’s investment merit for you in anticipation of its IPO.
Right off the bat, current estimates value the company at $100 billion – a number that has investors salivating over potential mammoth IPO profits.
[ad#Google Adsense 336×280-IA]The Facebook IPO will be a “historic” investment prospect, for sure.
But not in the way you might think.
You see, the coming Facebook IPO represents the greatest short-selling opportunity of our lifetimes – possibly ever. Let me explain…
Dot-Com Bubble 2.0
I hate to be a sourpuss here, but the fundamentals simply don’t support a $100 billion price for Facebook.
Even Google’s (Nasdaq: GOOG) much-ballyhooed IPO in August 2004 didn’t come close to that valuation. When it debuted – and did so with a much more vital service – it only tipped the scales at about one-fourth that market cap.
Let’s go a step further and use technology giant, Cisco (Nasdaq: CSCO), as a proxy. It boasts a market cap of $85 billion. And although it’s struggling with profitability, it annually generates over $40 billion in sales and close to $8 billion in profits.
By comparison, Facebook is only expected to produce about $4 billion in sales – not earnings – this year.
In other words, Facebook generates only 10% of the sales that Cisco does, yet is somehow worth more.
Simply put, the early valuations being tossed around for Facebook don’t jive with reality or any rational mathematics. Especially when you realize that the company’s growth is limited…
Hyper-Growth Won’t Last
When I evaluate potential IPO investments, I insist on growth that’s not only above average, but sustainable, too (i.e. – enough to support decades of growth).
Take restaurant chain, Chipotle Mexican Grill (NYSE: CMG), for example.
When it went public in 2006, it had 496 locations. But its market opportunity stood north of 13,500 locations, based on parent company, McDonald’s (NYSE: MCD), U.S. footprint.
Fast-forward five years and Chipotle has roughly doubled in size – to 1,084 locations. At that rate, it can keep growing for more than 100 years before hitting McDonald’s size or market saturation!
So it’s no surprise that CMG shares debuted at $22 and now trade for $327.
Bottom line: When you invest in an IPO, you’re investing in the future of the company. If it can’t keep growing, your investment is doomed.
And when it comes to Facebook, its hyper-growth rate simply can’t be sustained. Therefore, neither can its inflated valuation.
I’ll let the numbers tell the story…
Life, Liberty and the Pursuit of Facebook?
In 2008, Facebook boasted 66 million members. Today, it has 750 million. That’s more than a 10-fold increase in about three years.
If such torrid growth continues, Facebook’s user base would hit 6.5 billion in the next three years. That means practically every person on Earth would be using the social networking site.
I can guarantee you that’s not going to happen.
[ad#article-bottom]Even if we look at just the U.S. market, Facebook’s growth is nearing a saturation point. Its domestic user base currently stands at 144 million, which only leaves about 100 million more people over the age of 13 – i.e. potential Facebook users – in the United States.
Of course, 100 million is a big number. But again, Facebook isn’t a vital service that literally everyone is going to use. So the company’s true U.S. growth opportunity is much smaller.
However, the real problem with Facebook as a long-term investment has nothing to do with its users. It has to do with its business model.
Tomorrow, I’ll expose the company’s fatal flaw. And, more importantly, I’ll give you the precise time that it will topple the company’s share price in historic fashion, so you can position your portfolio to profit. Stay tuned.
Ahead of the tape,
— Louis Basenese
[ad#jack p.s.]
Source: Wall Street Daily