Facebook Appears To Be Overvalued

By Vinayak on Friday, September 6, 2013 with 0 comments

Venture capital funds have been trying really hard to get in on the social media hype. This has seen social media stocks rally at record levels this year with LinkedIn (NYSE: LNKD) and Facebook (NASDAQ: FB) being the main beneficiaries.

Analysts expect Facebook to finish 2013 with $7.32 billion in revenues and then again $9.54 billion next year. Additionally, a non-GAAP profit of $0.71 is estimated this year and then $0.95 in 2014. Facebook is more or less forecasted to have a non-GAAP net income figure of $1.8 billion this year, but the GAAP figure will be much lower than that.

Facebook had a great Q2 and it has adjusted upward most analyst expectations. Facebook shares are up almost 58% since releasing Q2 earnings, as you can see in the chart below.

It does seem like one great quarter can change everything


Facebook Stock Shorts Falling Rapidly
Facebook's short interest since its IPO in 2012

A recent update from NASDAQ shows that a little over 36 million shares were short in Facebook. Additionally, according to Yahoo, Facebook's float is almost 1.5 billion shares, indicating that just over  2% of the float is short. That is not a lot. Furthermore, FB's volume over the past 3 months averaged over 55 million shares a day. This signifies that it would take a full day for all shorts to cover, and that is not much. A days to cover ratio of 5, 10, or higher is considered significant, as opposed to being below 1.
Bottom line: Stock performance based on real FB results

Facebook is currently trading at a rich valuation despite the impressive Q2 results. The Social Network boasts a valuation that is now higher than the likes of perennial favorites like McDonald's, and is getting mighty close to Intel and Home Depot.

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When looking at price to sales, Facebook trades at about 3 times what Google (NASDAQ: GOOG) trades at even though it is only growing around twice as fast as Google. Then you turn around and compare Facebook to Apple, and the figures get even more excessive even after considering that Apple has shown sluggish growth as of late. So if Facebook is going to keep climbing (above $40 and beyond), the social media giant must continue to keep the impressive earnings results coming.

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Category: Stocks



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