What is the Trade in Facebook?

Facebook

shares were volatile on Friday, a day after the stock hit a new all-time low of $19.82. Traders played a bounce in the name, as the stock surged around 6 percent. However, in the final hour of trade, FB was well off of its highs. Looking ahead, what is the trade in Facebook? The sell-off in this IPO has been brutal and the entire debacle has left banks, institutional investors and retail investors with big losses. This week, UBS

disclosed that it lost $350 million as a result of Nasdaq glitches during Facebook's first day of trading. The company's $38 IPO valuation in hindsight appears to have been driven by a significant amount of hype. In light of a subsequent plunge in share price though, Facebook may be an entirely different investment at current levels. While the stock certainly was not a buy at $38.00, is it a buy at $22.00? Investors must first accept that, even at Friday's depressed prices, Facebook's investment outlook is hardly a sure thing. Even if the stock falls to $12.00 or $15.00, it would still likely be a speculative investment. The lower it goes, however, the better it looks. Investors who are convinced that they want to own Facebook as a long-term investment may start investing in the stock. The post-IPO plunge in the stock seems to have been driven by short-term market mechanics as much as it is by valuation. The company sold so many shares and so many investors were involved in the deal that, once Facebook's share price started heading south, many more additional sellers than buyers emerged. Many of the people who wanted to buy the stock did so in the IPO or immediately following its debut on the public markets. These investors did not want to miss out on an anticipated big pop. When that pop did not materialize, a preponderance of sellers arose. While this company is difficult to properly value and as chatter about slowing growth is circulating Wall Street, there could be considerable upside in the stock once the panic subsides. Friday, Facebook traded at a forward price/earnings ratio (P/E) near 33.6. This is a much more reasonable valuation than Facebook's sky-high P/E introduced at its $38.00 IPO price. By comparison, Google

, Facebook's closest comp, trades at a forward P/E of roughly 13. Facebook's market capitalization is around $45 billion while Google's is roughly $210 billion. Therefore, Google is around 4.7x as valuable of a company as Facebook. It is also a more mature company, which arguably does not have as attractive of a growth profile as Facebook. Nonetheless, Google may be undervalued at current levels. It has been showing extremely impressive top-line growth. The spread between Facebook's forward P/E and Google's sits at roughly 21, meaning that the market is implying much higher future growth for Facebook. The more that this spread falls, the more attractive Facebook would appear to be. This may seem particularly true to investors who believe that Google is currently undervalued. A strong argument could be made that at current prices Google is undervalued by roughly 20 percent. Many top value managers own this stock and believe that it is undervalued by at least that much. Furthermore, the median Wall Street price target on the stock is $731.09, which implies around 14 percent upside in the name. Investors who assume that Google, which is likely an easier company to value than Facebook, is undervalued by 20 percent might believe that than the true value of the company could be around $252 billion. The current multiple the market gives Facebook's market cap relative to Google's market cap is 4.7. Applying this to a $252 billion Google would imply a Facebook valuation near $54 billion. This analysis implies around 19 percent upside in the stock from current levels. Clearly, valuation is not an exact science. Investors should certainly keep an eye on the valuation spread, both in terms of market-cap and P/E between Facebook and Google. As Facebook becomes cheaper and cheaper, both on an absolute basis and relative to Google, Mark Zuckerberg's firm becomes a more and more attractive investment opportunity.