

Ask HN: Will you buy Facebook stock? - barredo


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meric
Three steps:

1\. Decide how much risk Facebook has compared to alternative investments in
the market.

2\. How much return do investments with comparable risk have?

3\. How much money will Facebook return to its investors over its lifetime,
discounted by the rate of return you can get with comparable investments
compounded by that many years.

Let's assume Facebook has same risk as Google.[1]

If you bought GOOG at 2004 for $100 and sold it today at $580, you got roughly
26% return year on year.

When will Facebook begin returning money to its investors? Assume 1 years from
now they will have more than doubled their profits and begin paying $2 billion
a year in dividends, growing by 20% per year from there, _forever_.(so 2013:
2B, 2014: 2.4B, 2015: 2.88B) [2]

So let's substitute all these numbers into this financial formula I learned
last week to find how much Facebook is worth[3]:

Value = (2 billion) / (0.26-0.2) = 33 billion dollars.

As 33 Billion is < 100 Billion, a conclusion is made where Facebook is deemed
to be overvalue and its stock should be sold and invested into Google instead.

[1] Remember, we're assuming Facebook has as low a risk(volatility in dividend
payment) as Google. For a much younger company like Facebook this is
incredibly unlikely. So a discount rate of only 26% is incredibly generous, it
should be even higher.

[2] Yes I know Facebook profit increased by 100% last year, but it is still
only $1 billion dollars and unlikely to grow forever. Also, paying dividend
could be substituted with share buybacks and the result is the same, money is
returned to shareholders.

[3] This formula is called "Gordon's growth model" and is a formula learned by
second year university students studying finance.

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staunch
Their valuation is 5+ years ahead of a dream that only _may_ come true. So
unless you're bullish enough to hold onto it for a long time, or you're
gambling on short-term volatility, it seems like a bad bet.

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jmsduran
Although I do not own a stock portfolio yet (it's on my financial to do list),
I personally would be wary of owning Facebook stock at this moment or in the
near future.

People have been buzzing over a Facebook IPO for at least a year now, so when
the moment comes you bet it will be a highly publicized event. Pre-IPO
investing is already risky to begin with, and I have a feeling that all this
media frenzy may make Facebook's stock unnecessarily volatile at the start.

Sure, the people buying in now may get lucky and see the stock rise in value,
but it's also possible that this IPO may just turn out to be another Groupon.
Although I'm still in my 20's, I'm not much of a risk taker when it comes to
personal investments. Sorry, but I'll pass for now.

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mrkmcknz
If you believe in a companies fundamentals and future outlook 'trading'
volatility isn't an issue.

Of course it will be when your buying options contracts or day trading, adding
Facebook to a long term portfolio is a strong move.

My main belief in Facebook stock comes from the fact Facebook is the company
being built on top of at the minute, the ecosystem for Facebook is super
strong.

They just need to figure out how to monetize mobile.

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coryl
One factor about this stock that may inflate its value is its popularity.
Everyone knows what fb is, and has heard its success story through books and
movie. This may make it overhyped and oversubscribed.

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dcpdx
I remember people saying Google was steep at $85 when it IPOed in 2004. I
think at their most basic level, they're fundamentally the same: Google
defined search, and now Facebook is defining social. I'll be picking up some
shares after the initial spike and resulting dip. Then settle in for years of
steady growth (hopefully).

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wavephorm
There's one important difference: Google was valued around $20 Billion when it
went public, and it is now worth $187B. How much market cap growth can
Facebook possibly attain over the coming years? They're going to have to start
monetizing their users or that hefty stock price is going to erode over time.

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mrkmcknz
I've loaded up with a few shares via second market and I literally can't buy
enough, even my grandmother is in Facebook.

It's going to be an industry leader and there will be strong demand from money
managers which one would imagine will only lead for a strong buy sentiment.

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DealisIN
Definitely plan on swing trading at IPO...no plans to keep in long-
portfolio...yet. Will get back to you when I review prospectus.

