Buy Side Lukewarm on “FB”

Terry Flanagan

Facebook may be king of the social media investing pool but that still doesn’t mean its valuations aren’t outrageous for some.

Boo…Pets..eToys…sound familiar? You might have heard of these internet dot.com companies if your portfolio took a harrowing dip in 2000 and 2001. Of course, as the markets would have it, history often repeats itself. For some, the dot.com bust may have started to manifest itself once more in 2011 and 2012, through the various IPOs (initial public offerings) of today’s social media giants.

On February 1, Facebook, the brainchild of Harvard drop-out Mark Zuckerberg, has officially filed a long-anticipated prospectus for an IPO to raise $5 billion. While Main Street might want a piece of the action, institutional managers like Neil Hennessy, founder of Hennessy Funds, warn against being too eager to get in.

“If retail investors get in at this level, they’ll be sorely disappointed and that might hurt consumer confidence,” he told Markets Media, noting that investing in Facebook would be analogous to retail investors’ unwarranted faith in fixed income, which is currently providing low returns.

“Facebook is a quality brand, but it’s another thing to pay unreasonable valuations.”

Valuations are important to Hennessy, whose assets under management are north of 750 million. The firm manages a wide array of mutual funds for a mix of retail and institutional investors, ranging for international large cap value to Hennessy’s “Focus 30” fund, which utilizes a disciplined, quantitative formula to invest in 30 growth-oriented stocks for long-term capital appreciation.

“As it stands now, Facebook would never come into my portfolio,” Hennessy said. “It’s an emotional stock and you have to be careful because you know at some point, the investment decision making process will get ugly. The stock will be very volatile but I doubt one stock could make the entire market.”

In 2009, Facebook brought in nearly $800 million in revenue. That has increased to nearly $2 billion in 2010, and doubled to $4 billion in 2011. Earnings have also grown exponentially during the same time period; from $229 million, to $606 million, to $1 billion.

The numbers are impressive enough to garner bids from Wall Street’s top-dog underwriters: Morgan Stanley, J.P. Morgan, and Goldman Sachs, to name a few.

“It’s a good company with a lot of innovation,” Hennessy said of Facebook. “But the bottom line for me is that I just don’t see how people are going to pay $25 for $1 in sales; that’s awfully rich to me.”

Though, there are institutional traditional money managers that would be very eager to include Facebook into their portfolios. Among them is T. Rowe Price, who disclosed a $200 million private stake in Facebook back in April of 2011.

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