Kass: Egg on Your Facebook
Written by: Doug Kass
Tickers in this article:
FB AOL GOOG AAPL TWX GRPN
Business trends: The rate of revenue growth is decelerating -- the first quarter experienced 45% growth in sales, down from 55% growth in the prior quarter. Advertising, in particular, is slowing, with a 37% growth rate in the first quarter. Google's (GOOG) display ad business (which competes directly with Facebook) is growing faster than Facebook.
Profitability: Facebook's 50%-plus operating margin seems vulnerable. With nearly 1 billion current users, the low-hanging fruit -- and I am being somewhat facetious -- might have already been picked. I suspect the next 1 billion users will be less profitable to Facebook.
Financial: Facebook is cash flow negative now as the company spends to grow (on data centers, more employees, etc.).
Valuation: Back then I went through the exercise of supposing that Facebook's revenue growth accelerates modestly to 50% and that operating margins are sustainable. In this example, Facebook will achieve almost $5.5 billion in sales in 2012 and $8.25 billion in sales in 2013; EPS will be $0.60 in 2012 and $0.95 in 2013. At the offering price of $38 a share, these are high multiples, both absolutely and relative to other leading tech companies such as Apple (AAPL) and Google (at 10x to 11x, respectively).
All this said, I would continue to stay away from the shares of Facebook.
My only regret was that I didn't short Facebook during the first week of its IPO launch, as I did successfully with Groupon (GRPN) .