Short Facebook If You Want A Profit

Investors who wanted to profit from the Facebook IPO should have bought puts with strikes of around $35 (or taken some other short position) when the stock jumped over its $38 offer price on the opening day. The stock’s intra day high hit $45 and it closed at $38.23.

Buyers who are whingeing because Facebook stock didn’t double on listing like LinkedIn’s IPO are naive idiots, as is anyone who bought LinkedIn at $90 (other than to sell at $91). Its earnings guidance was for a net loss in FY 2011. Its shares are not worth the $45 IPO price, let alone $90.

People are blaming Morgan Stanley et al for a dodgy Facebook IPO in which an extra 84 million shares were added to the offer pool last Wednesday. After all the post-GFC exposure of investment banking practices, does anyone believe these institutions are honest? They are only interested in fees and profits. The dilutionary addition of the extra shares should have rung alarm bells. By then, it was too late for the IPO subscribers, but they could have dumped their stock once it began falling from $45 on the opening day.

The only way traders will make a profit from Facebook in the near future is either by short term volatility trades or short positions such as put options. I say traders, because longer term investors will need to wait some time for the stock to fall to a sensible price / earnings (PE) multiple.

The Facebook offer price of $38 set the stock at a PE ratio of around 100. This is insane. Most stocks trade at PEs of 10 - 15. Apple currently trades at 14. An investor might occasionally consider buying at a PE of 20 if there was good reason to expect well above normal earnings growth, sustainable for the next few years. But a PE of 100 is idiotic. It’s starting to look like the tech bubble, with its bullshit exponential earnings growth assumptions in new technology valuation models.

What are Facebook shares really worth? Look at the lessons from the first tech bubble. Don’t buy stock with a PE above 20 unless you’re a volatility trader or short term investor looking to profit from a momentum trade. A PE of 20 puts Facebook stock at around $7.50. Even a PE of 25 puts it at $9.50. I reckon if you’re patient, it will get there some time in the next 2 to 3 years. It’s already down to $30.

Of course, had Facebook not deleted the user accounts of the popular characters Bummy McDick and Goate Reamer, the stock may well be worth $38.

Update:

In after hours trading on 27/07/2012, Facebook shares hit $23.83. They will almost certainly fall below $20 before the end of 2012. Even at this price, don't buy them unless you're trading a bounce. There is no genuine value in FB above $US15 a share. I'd wait and see if they get to $10.