Nasdaq’s giant monitor in New York’s Times Square is seen as Facebook’s stock is set to begin trading on May 18, 2012.Bebeto Matthews/The Associated Press
Just when it looked like it might be safe to take a flier on Facebook Inc., shares in the social networking company were slapped down again, this time courtesy of a negative cover story in the latest edition of U.S. financial weekly Barron's.
Barron's said the stock remains way overpriced, despite plunging 40 per cent from its May initial public offering (IPO) price of $38 (U.S.) a share.
In response, Facebook shares sagged $2.07 or 9.1 per cent in heavy trading Monday to close at $20.79, bringing to an abrupt halt an upturn in the stock off its low of $17.55, reached in early September.
The market action came on a day when one of Facebook's arch rivals in the tech space, Google Inc., surged to a new record high of $750.04.
The Barron's story was critical of Facebook's lofty share valuations, which have the stock trading at 47 times this year's projected earnings and 36 times next year's.
The shares also trade at more than 10 times revenue when Facebook's cash on hand is stripped out.
Google and Apple Inc., both technology giants with proven businesses, trade at about 16 times projected 2012 earnings per share.
Google changes hands at half the price-to-sales valuation of Facebook.
Given the metrics, Barrons pegged a fair value on Facebook at "perhaps only $15," hinting that even at such a reduced price, the shares may not be a bargain.
Some analysts contend that investors overreacted, saying that Facebook's multiple to both earnings and sales have been well known and largely priced into the stock.
"There is nothing new" in the story, says Brian Wieser, senior research analyst at Pivotal Research Group in New York, who said nervous investors stampeded to the exits based on jitters that the Barron's analysis would cause a selloff, turning it into something of a self-fulfilling prophecy.
Mr. Wieser, who said at the time of the $38-a-share IPO that Facebook was too expensively priced, now has a bullish take on the stock and a $32 price target for next year.
Facebook was further buffeted during the session by claims of a privacy problem that allowed direct messages between users to be made public.
The company said no such breach occurred.
"A small number of users raised concerns after what they believed to be private messages appeared on their Timeline," the company said.
"Our engineers investigated these reports and found that the messages were older wall posts that had always been visible on the users' profile pages. Facebook is satisfied that there has been no breach of user privacy."
Some stock watchers have been leery of Facebook's business because users are increasingly accessing the service through mobile devices, where it is more difficult to place advertising than on more advertising-friendly desktop computers.
But Mr. Wieser said he expects new advertisers will migrate to the mobile services, creating an expanded source of revenue.
One of the factors that Mr. Wieser said is bolstering his bullish view is the high degree of negativity toward Facebook – a sign to contrarian investors that the stock has become overly depressed.
"The market sentiment towards this is terrible," Mr. Wieser says.
"Why would you like a stock that's got no room to go up? If it's fully valued then there is nothing to love."
But he cautioned that Facebook, even at current levels, shouldn't be mistaken for a safe investment.
It's a risky stock.
"You certainly wouldn't invest all of your kid's college savings against it," he said.
With a filing from reporter Omar El Akkad