Facebook’s (NASDAQ:FB) stock has some serious troubles. Facebook was supposed to be the biggest IPO of the current market cycle, but it’s quickly becoming the fastest way to lose money. The stock crashed over 9% yesterday and is already starting the day with more sellers lined up than buyers. This is becoming one of the worst twists for what’s been a story-book business to pre-IPO.
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Only one question remains in the short term: how low can Facebook go?
Unfortunately, when stocks rise to the upside with much more hype layered on to their price than fundamentals can support, these same stocks can also collapse just as quickly. Where are some areas value investors might support? They are much lower than here.
If we slap Google’s (NASDAQ:GOOG) 7x revs multiple at its IPO onto Facebook, Facebook will land at $19. If we start cutting into the lofty P/E ratio on justified issues over slowing growth, and slap on a still nosebleed 50 PE, we get $19.50. You can buy Google’s earnings for 18x and Apple’s (NASDAQ:AAPL) for 14x while still getting great growth. So today’s current 75x for Facebook seems, well, financially illiterate.
Whether we like it or not, Facebook has a recipe for complete equity disaster. Employees are probably freaking out and trying to dump everything on fears it’ll get worse. Surely retail investors with no financial savvy are going to panic at some point and throw in the towel — especially with market cap disappearing at this pace. That’s bad news because the selling can get fierce and take on a life of its own.
At some point institutions will place a floor in the stock. But we can see a lot of panic selling between now and then. Be careful out there!