In a column on the day of the Facebook initial public offering, I warned investors to proceed with extreme caution. My main concerns about Facebook involved the high valuation, young CEO, hype and potential competition from the likes of Google and others.
The headlines today are that Facebook has dropped from its IPO price of $38 to the low $20s, or 45 percent. In fact, the performance is actually worse. Facebook opened on its first day of trading at $45 a share. There were complications with execution orders, but anyone who placed a market order likely bought the stock at around $45 a share. The stock closed on Wednesday at $20.88 a share, making the actual decline closer to 54 percent. Considering the company went public in mid-May, it is pretty bad to lose half your money in about 10 weeks.
Now many analysts are following the herd and giving the stock absurd valuations. One analyst gave a target price on the stock of $4 a share. It seems that the pendulum has now swung in the completely opposite direction. While Facebook does not seem cheap at the current price, $4 a share seems quite low.
Before discussing Facebook, readers should recall what Benjamin Graham stated about investing. Decades ago, Graham stated something to the effect of “There is no such thing as a good stock or a bad stock, it all depends on price.” For readers unfamiliar with Graham, Warren Buffett considers Graham his mentor.
Back to Facebook…
At $4 a share, the company would have a market capitalization of under $10 billion. That would make it a rich target for an outright acquisition by Apple, Google or other large tech companies. Apple, Google and Microsoft all have the cash to buy Facebook outright or can issue cheap debt and buy all or part of the company. Facebook is still worth something at $4. Close to 1 billion users has to be at least worth something.
What about poor management?
When companies seem like good businesses, but have bad CEOs, activists like Carl Icahn, Dan Loeb or Bill Ackman scoop up shares and try to implement change. Even though Facebook has a structure that gives Mark Zuckerberg close to full control of the company, with Icahn breathing down his back, he would likely be willing to make some changes. Additionally, at $4 a share, Zuckerberg might want help to turn around the company.
An important lesson for investors to learn is that the more a stock falls, the bigger bargain it is. Of course, this is not an ironclad rule. However, as Facebook share prices decrease, investors should be more optimistic on the company, rather than the opposite.
(Disclosure: The author of this article has no position in any securities mention)
© 2014 Moneynews. All rights reserved.