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Looking for the bottom of a fast-sinking Facebook

Cars are shown driving past a sign at Facebook headquarters in Menlo Park, Calif.

Jeff Chiu/AP

Before Facebook Inc.'s initial public offering in May, all the talk revolved around how high the shares would soar.

Now, everyone is wondering where the floor is. And the speculation has become more relevant as the share price approaches half its IPO price of $38 (U.S.).

An analysis by Thomson Reuters StarMine shortly after Facebook shares began trading suggested that the stock would be fairly priced slightly below $10. (It closed Friday at $19.05, down 82 cents.)

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The analysis looked at 10-year earnings growth estimates from six brokerages, and found that these estimates trailed in a big way the earnings growth implied by the share price at the time.

But here's the problem with speculating about how far Facebook shares will fall before they finally hit a trough and become a tremendous buying opportunity: It assumes that Facebook's business model stays on course.

That is, it assumes that the social media site will remain culturally relevant, that new users will flock to the site and devote ever-increasing amounts of time to it, and that advertisers will want a piece of the action.

If Facebook shares were to fall below $10, I suspect the news will be considerably darker than that.

A dive that sharp – 74 per cent below the IPO price – implies that the market has pretty much given up on Facebook, that the site is showing early signs of boring people, and that growth has shifted to survival.

In other words, it would have to become another Groupon Inc. Shares in the "daily deals" social media company have fallen about 77 per cent from their IPO amid growing skepticism about the company's potential.

Has Groupon become a tantalizing buying opportunity as its shares meander below $5, from a starting point of $20?

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Hardly. Analysts have been busily slashing their target prices on the stock. For example, JPMorgan has cut its target for Groupon to just $8 from a high of $24 as recently as April.

If you believe in Facebook as the world's best social media company – one that has staying power and the ability to build earnings on its massive number of users – then today's share price seems like a good deal.

It is half the price everyone was happy to pay as the IPO was ramping up, and looks like a decent foundation upon which to roll out strong earnings growth.

But if you're going to wait for the stock to fall to $10, you might as well bet that Facebook is going to die a very quick death.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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