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Facebook Confronts The Law Of Big Numbers

 May 23, 2012 01:33 PM

Author: Patrick McFadden, M2 Global
Covestor model: M2 Global

Beware of a Facebook (FB) top! Ahead of the social network's initial public offering on May 18, there were competing news reports about the level of investor interest and outlook for Facebook. It is refreshing that we can see exactly where people stand on Covestor.com.

Facebook's IPO price was set at $38 per share on May 17 giving it a market value of about $104 billion or in the range of eight times-plus net book value per share post offering. The most recent updates to the S1 also indicated that net operating margins and profit margins may be under pressure. (In the first few days after the social network site's offering, Facebook's stock has performed poorly.)

[Related -Gold hasn’t lost its allure in my portfolio]

Surely this makes sense as Facebook's management has hired aggressively and expanded infrastructure to accommodate growth. The issue: The company may be starting to run into the law of large numbers and simply may not be able to continue to grow at the previous pace. Remember, they are banned in China.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

Operating leverage will be key for the future price of this stock, but with large number of Facebook users moving primarily to mobile platforms, it will be more difficult for the company to monetize users via display ad-click through. Will Facebook be able to draw an increasing share of the online ad dollars spent by the Fortune 500?

If they can continue to take share from Google (GOOG), Yahoo (YHOO), and AOL (AOL), Facebook will be successful. However, much of this success seems to be priced in at anything above 20 dollars per share.

The Economic Cycle Research Institute (ECRI) has been saying for months that its database of forward indicators on income and consumption is predicting that we will go back into recession this year.

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