Why Facebook Might Still Grow Its Valuation or Justify It
Many stocks are going to look a lot cheaper the minute Facebook starts trading.
(One could argue the "success" of Groupon, but there's no doubt that the company has already made early investors a lot of money. I also think it's too early to declare Groupon dead, but that is another article/investment discussion.)
According to the latest S-1 filed with the Securities Exchange Commission, Facebook's growth is in the 45% range. However, I think this might be a bit sandbagged and I expect to see Facebook's growth accelerate again. Even so, I think it's fair to say the days of 100% growth are gone.
As a comparison, when Google (GOOG) first traded, it carried a 14x multiple to sales and was still producing 100% growth. Clearly, Google was in an earlier growth phase and frankly a better deal on a valuation perspective. However, that doesn't mean Facebook is a bad deal.
In my view, while Facebook is done growing by triple digits, I also think it may be able to grow at a fairly strong rate (say 30-50%) for an extended period of time. If I'm correct and Facebook grows strongly for an extended period of time, it will either grow into its valuation or at least justify it.
Again for some comparables, both Baidu (BIDU) and VMware (VMW) have never traded at cheap valuations but have also sustained growth and have justified their early pricing premiums. For its part, Baidu is still trading at 17x sales nearly six years following its public offering. Personally, I'd much rather invest in Facebook at 25x sales than Baidu at 17x.
The question is, can I catch Facebook anywhere close to 25x sales.
Also by Sean Udall:
After the IPO: A Strategy For Trading Facebook
A Rising Tide: 7 Stocks Poised to Benefit from the Facebook IPO
New! The TechStrat Report by Sean Udall. Sean provides in-depth analysis, strategies and trades across the technology sector. Take a FREE 14 day trial.
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