What looks like a fire sale is actually a rip-off.
A couple months ago, we hinted that Facebook’s stock was grossly overpriced.
Our post wasn’t as much of a financial analysis as it was a metaphor — or even a lesson — for the local media and business community. The message was simple: Sometimes things look like a clear BUY but aren’t, because we don’t readily recognize that they are wildly over-valued — a clear sign that we’re using a misleading valuation process.
Here we are two months later. We’ve seen 48% of Facebook’s stock price erode into thin air, as of the closing bell on August 16th. It’s a small sign that the market is working. But it’s far from perfect.
Even after losing nearly half of its street value (or at least its Wall Street value), here’s the scary part: If Facebook were to double its projected earnings over the next 12 months, it’s stock would still be 50% too high (on a P/E basis) when compared to that of Google and other industry notables. (Facebook is trading at a 37x multiple, Google around 15x earnings.)
In other words, if something is selling at a 5x-fold premium (as was the case with Facebook — and still is the case with many local media), even if it’s price is cut in half, it’s still 2.5x more expensive than it should be.
Here’s the clear-as-day lesson for local business owners and media execs: Even when alternatives are discounted and look attractive, they can still be wildly overpriced. Plenty of media out there are offering fire sales on their inventory. Not only is it unwanted inventory, it’s still priced way above where it should be — even after the discount. Just like Facebook’s stock price would be if it doubled its earnings in 12 months.
Business owners: be careful out there. If something looks too good to be true, it probably is. You could be buying a big bucket of trash.
Dave Eckstein is a Partner in the firm ESA & Company. He specializes in highly profitable market share growth for local businesses and gets a kick out of demonstrating a declining cost of customer acquisition. He plays baseball, but isn't that Dave Eckstein.