From this Barron's article that looks at Facebook as an investment:
The best businesses can be poor investments, if you pay the wrong price.
It's easy to understand the excitement around Facebook.
Yet, it's not like competitors have lousy prospects. The article points out Facebook will probably sell for 100x earnings when it initially goes public. Google (ticker: GOOG) and Apple (AAPL) sell at much lower multiples of earnings and both are solid (or better) growth companies.
As the article points out, Google and Apple have much more net cash and investments while Facebook's valuation implies hyper-growth.
As Google demonstrates, it's tough to sustain hyper-growth, and that's what Facebook's likely price implies.
It's certainly possible, even likely in the longer run, that Facebook may grow into its valuation but, excluding net cash and investments, Google's forward P/E is ~12x while Apple's is less than 8x.
Even the very best businesses have risks and uncertainties. The only protection for an investor is to pay a price that doesn't reflect high hopes and rosy expectations.*
Facebook, Google, and Apple all certainly seem to have very good prospects. Yet, all tech businesses compete in dynamic industry environments that are highly unpredictable. Each clearly has a unique set of risks, uncertainties, and challenges.
As I've explained previously here and on other occasions, there's just no technology business that I'm comfortable with as a long-term investment.
Every time capital is put at risk, there ought to be a high probability of being compensated with an appropriate return for the trouble.
Pay too much and, even if things work out reasonably well for the business itself, the reward may end up being too small compared to lower risk alternatives.
Long positions in AAPL and GOOG established at much lower than recent prices
* Quite a few stocks have run up an awful lot in price lately. There are exceptions, of course, but I won't be buying much of anything in the near term until something sours the market mood a bit. The time to buy is when the headlines are awful. Stocks with momentum inevitably attracts bandwagon "owners". I'd rather buy when something has scared some of them off the bandwagon. I understand some like to trade the hot stock of the moment with a great story. For those involved in that sort of thing, I have no particular skills or opinion whatsoever.
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