Facing the Books

Should you buy shares of Facebook?

Before I answer that question let me re-state the obvious: this blog doesn’t dispense investment guidance, recommendations to buy or sell securities, or anything remotely resembling advice. For that you need someone who can tailor a plan to fit your particular goals and constraints. Blogs don’t do that.

But having said that, is it a good idea to buy Facebook now? After all, many people get a lot of enjoyment buying MacDonald’s shares and eating at MacDonald’s, buying Disney shares and going to Disneyland, refinancing their mortgages and owning shares of—wait, that one didn’t work. In any case, buying the shares of a company when you also buy the product is a good way to remind yourself that a portfolio isn’t just a bank account with a volatile value; it’s a lot of pieces of the global economy.

And Facebook is a global phenomenon right now. It has over 900 million users, and it is estimated that nearly half of its younger users check their profile every day, with over a quarter of them checking it before getting out of bed. While Facebook doesn’t make that much from each user—a little more than a dollar—its growth has been phenomenal.  

Based on the papers Facebook recently filed with the SEC, last year they made 43 cents per share, and they’re expected to earn 60 cents next year—40% annual growth, and 56 times 2013 earnings. At such a growth rate—difficult to sustain, when you already cover 1/8th of the planet—it would take 13 years for the company to retain $34 in cash—an eternity in technology. At these levels, Facebook is grotesquely overpriced.

Still, for some growth-oriented tech-focused portfolios a small position might make sense. After all, they said the same thing about Amazon, and it has sustained its lofty valuation. But usually a high valuation is a signal to stay away.

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