A Simple Facebook IPO Analysis

Disclaimer: I am not a stock analyst, and it's been a long time since I've invested in the stock market. Although, I am proud to say that when the stock market tumbled in 2008, I made money all the way down to the bottom, around DOW 7000, by purchasing an ETF that is 2X bear on the DOW with the symbol SDS. Once the market hit what I thought was the bottom, I flipped my position and purchased SSO which is 2x bull on the DOW. I was once again correct and the market began to climb. I thought I was a stock market genius. Once the market reached 10,000 (see my chart below) I flipped my position again since I thought things were going to tumble again, but the market proceeded to go to 13,000, and I got crushed.

I guess I am a tech nerd, and I should stick with what I know and leave my investing to the professionals. Despite this, I think I have some basic insight into the Facebook IPO. Although, a gazillion articles have been written about this IPO, I am sure nothing I have to say is original, I'd still like to share.

There are a few basic numbers and comparisons one can look at that I believe paint a very clear picture. I stumbled across a Barrons article here which showed the following data:

Some basic things to point out, Market Capitalization is the total number of outstanding shares multiplied by the price of one share. So according to this chart, if you take all of Apple shares and multiply that by the current price you get a number close to $500 billion! This makes Apple the company with the biggest market capitalization in the world. I did some basic math (I hope there are no mistakes) on the numbers above and you see the ratios are very out of whack.

What sticks out to me here is the fact that Apple has a market capitalization that is 4.7 times that of Facebook. Apple has revenues that are 31 times that of Facebook. Despite these astounding metrics, Facebook is trading at a P/E ratio (Stock Price to Profits) that is 6.9 times that of Apple (76 for Facebook vs. 11 for Apple). To put this in perspective, if Apple were to trade at the same P/E ration that Facebook is today, the Market Capitalization would be $3.4 trillion and the stock price would be around $3,600. See the following table. This is what seems so insane to me, and why the upside on the stock price seems so limited right now in the short term.

So why is Facebook trading at this level? This is probably due to the fact that people think there truly is a tremendous upside to Facebook. And there is probably some validity there considering the fact that they almost have 1 billion users worldwide, and have barely figured out how to make money with mobile. After doing some research online, it seems that more than 50% of Facebook traffic comes through mobile devices and probably a lot more. Facebook is not monetizing mobile at all! Facebook indeed had a disappointing opening day as the IPO price went nowhere, but in the coming years, I think it's entirely possible they do become the biggest most successful company in the world.

Lastly, I regularly check The Drudge Report for a quick snapshot of whats going on in the world. I love when he publishes his obscene misleading headlines such as the ones shown here:

Let us be clear here. The IPO provided a return to the pre-IPO investors that is unprecedented. There were reports that more than a 1000 millionaires were created, and a handful of billionaires. The people who did not receive a return were those people who bought at the $38 dollar level the day the stock began trading. I am confident, that if these people hold on, they will be very happy with the returns that Zuckerberg provides in the coming years. To see just how big the IPO was, check out this awesome set of info-graphics provided by the New York Times

On the other side of the coin, after doing this tech nerd analysis, it seems Apple might be undervalued. Take a look a this chart from TechCrunch:

In only 4 years Apple has sold almost 200 million iPhones, and in 2 years nearly 50 million iPads, and there is absolutely no sign of a slowdown for either product, look at that trajectory! Maybe Apple's P/E ration should be trading closer to the P/E ratio of Facebook which is an amazing 76. The average P/E ratio of the S&P is 20, and Apple's is a meager 11. Either way, it's exciting times for the tech industry, and I am more excited than ever to be a part of it.

In conclusion, I think Apple is a buy right now, and I'd stay away from FB for a while until the dust settles.