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5 reasons not to buy Facebook

By Judy Martel · Bankrate.com
Sunday, May 20, 2012
Posted: 7 pm ET

It would have been pretty hard to avoid Friday's hyped publicity surrounding Facebook's initial public offering -- the largest ever, with a market cap of $110 billion -- leading many investors to ask, should I succumb to Facebook fever and buy?

Mark Zuckerberg, CEO of Facebook

Though many financial advisers acknowledge it's a good business with good management, ultimately, the price is too high, they conclude.

And for all the hoopla, it closed up on Friday by only 23 cents.

InvestmentNews published reasons not to buy Facebook stock. Here are five:

1. It has a ridiculous price-earnings ratio. Facebook's price of 105 times earnings and 25 times revenue is stratospheric. Compare it to Apple's price-earnings ratio of 13 to 1 and Microsoft's 11 to 1.

2. It's not a defensive stock. Some advisers are arguing that with all the volatility in the stock market, this is not the time for investors to pull out of stable investments in order to chase an initial public offering. The glitzy marketing is causing people to lose their common sense.

3. It’s headed the way of the dinosaurs. The Internet provides a great arena for startup companies, but its ease of entry means that rivals are already launching the next big thing. For a recent history lesson, please refer to MySpace, Netscape and Friendster.

4. The business model is unstable. Why? Because it relies on advertisers, not registration fees. General Motors already pulled its advertising because it wasn't getting reader follow-through.

5. It's a potential bubble. When everyone is rushing to buy, it's time to look at what the smart money is doing. Early investors are selling out. Tiger Global hedge fund is selling 23.4 million shares, and Silicon Valley investor Peter Thiel is selling 16.8 million.

Certainly there will be money to be made with Facebook. The question is, has it already been made, and will the biggest winners be the ones who short the stock?

What are your thoughts on Facebook's public offering? Is it a good buy?

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Ben G
May 21, 2012 at 9:02 am

Makes sense, but not something I would completely follow. I say buy a little just to be on the ship, but do not buy a lot. FaceBook can be a bubble, but that is not going to happen soon.