“I’m going to put $10,000 in Facebook’s IPO”.

I was having a conversion with a friend of mine yesterday. He’s a reasonably smart guy. He’s a technology manager at a wireless carrier company and does quite well. At least regarding his income. When it comes to his investments, I have my doubts.

“I think it’s over-valued”, I told him.

“I don’t care. I just want to invest in Facebook. It’s a great company. It’s growing”.

“Yeah, but it’s over-valued”, I argued. “You should go work for them. But don’t buy the stock”.

“I think it will do well”, was his reply. “It’s profitable”.

“Do you know how much it’s worth?”, I countered.

“I think its worth $100 Billion”.

“No, that’s the IPO price. What’s it’s worth? What’s the revenue and profit?”

“I don’t know. And I don’t care”, he admitted.

Apparently my friend is so enamored with Facebook that he’s willing to pay any price to own the stock.

It’s widely believed that Facebook will be offered at a valuation of $100 Billion. With about $3.7 billion in sales and $1 billion in net income, it’s a bit to pricey for me.

The fact that it’s being offered at 30 times sales and 100 times earnings is not relevant to my friend’s decision.

Like most people, he doesn’t even understand what it means when a company sells for a 100 times earnings.

Suppose you were going to buy a sandwich shop. You paid $100,000 to own it outright. At the end of the year, the manager sent you a check for your share of the profits — and it was a only $1,000. Would you invest in that sandwich shop? Well, that’s just like investing in a company like Facebook.

Ah, but what about growth? Surely there’s a lot of growth considering that the whole world will eventually be using FB, right?

Well let’s take a look at that.

Assuming the company has 800 million users, their per customer revenue is about $4.65, with a net income of $1.25.

And let’s assume that even if every person in Asia joins in, they’ll have 5 times the customers.

But these customers only have 1/10th the spending power as Americans. But I’ll be generous and say they have 1/5th the spending power.

So basically, FB’s user base will surpass 5 billion, while their net income will only double to $2 billion. In which case their PE will be 50 instead of a 100. It’s still way too expensive! Using the sandwich shop analogy, you’d now get a check for $2,000!

If it was going public at a $10 billion market cap and paying at least a 1% dividend, I think I might be interested.  But as someone already said, Facebook already went public – only you weren’t invited!

What about your friends? Are they falling over themselves to get in on the FB IPO?