Why Some Wealth Managers Are Having A Hard Time Recommending Facebook

Posted Feb 3, 2012

Facebook is anticipated as being one of the hottest IPOs of the year. However some wealth managers are having a hard time recommending Facebook to their clients. When Facebook goes public, the social network company is expected to hit a valuation between $75 and $100 billion. This means that they are the most anticipated stock offering from Silicon Valley since Google went public 8 years ago.

Granite Investment Advisors in New Hampshire has already been answering queries from their clients to get in on the stock. “We had some clients call and once we step them through the numbers, they sober up,” stated Granite’s Chief Investment Officer Scott Schermerhorn. “The valuation is 100 times earnings in a stock market that is trading at 12.”

“At the end of the day, if you have a small amount of money that you are in a position to lose a chunk of it and you want to speculate on Facebook, go ahead,” he added in an interview. “But don’t use money that you really need to save to do it. I would put it in Microsoft, which is dirt cheap right now.”

However many technology analysts argue that Facebook’s growth potential exceeds Microsoft. Microsoft has been trading at between $20 and $30 for the past decade. When Apple went public in 1980, they had a valuation of $1.19 billion, which was 25 times their revenue and 102 times their earnings. Facebook would be trading at 27 times their revenue and 100 times their earnings.

When Google went public in 2004, they were trading at 218 times their earnings and was valued at $23 billion. If Facebook was able to replicate Google’s stock growth, they would become the first $700 billion company.

“At these valuations, investors really need to set aside emotion… and invest with their heads,” stated Capital Advisors Wealth Management managing partner Edward Reinhart. He bought Facebook stock through private markets two years ago.