Cramer Weighs in on Facebook IPO

After much anticipation and hype, the long-awaited Facebook IPO will happen Friday. The social networking giant is scheduled to start trading on the NASDAQ under the symbol "FB." But is Facebook even worth buying?

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“As usual with an IPO, this is not a black and white issue. It’s all shades of gray,” said Jim Cramer on CNBC’s “Mad Money.”

The Menlo Park, Calif.-based company plans to sell 337.4 million shares between the $28 and $35 range. Given the considerable demand for the deal, though, Cramer thinks it will likely price much higher. Yet at the mid-point of this range, Facebook would have a market capitalization of $86 billion. To some, it sounds like yet another dot-com bubble, but Cramer disagrees.

“If you can get in on the actual IPO, then I think Facebook is a no brainer,” Cramer said. “We all know this one’s going to pop like crazy on its first day of trading, so if you can get in on the deal, I think you should try to get your hands on as many shares as possible.”

Once Facebook goes public and starts trading in the aftermarket, though, it’s another story all together.

“Whether or not this stock is worth buying in the aftermarket depends entirely on price,” Cramer cautioned viewers. “And I think the valuation might end up being too much of a stretch.”

The consensus estimates suggest Facebook could earn $2 a share in 2015, Cramer noted. Facebook could earn $4 a share in 2015, though, if CEO Mark Zuckerberg figures out more ways to monetize his product and comes up with a way to be more profitable in mobile than anybody else.

“This is a business that scales dramatically because you, the user, provide all the content,” Cramer said. “But once it comes public, will it still be cheap based on $4 of earnings per share in 2015?”

To answer that question, Cramer looked at the hypothetical scenario of where the stock might shoot to $50, a 42 percent increase from the high-end of the price range. If the company makes $2 of earnings per share in 2015, Cramer thinks the $50 share price is “OK.” Should it make $4 of earnings per share in 2015, though, he thinks the $50 share price would be terrific.

If Facebook skyrockets to $80 a share, though, Cramer thinks it would be too expensive because it means you’d most likely be paying 40 times earnings for the $2 of earnings per share it could earn in 2015. At $80 a share, Cramer thinks the stock would be too expensive even if Facebook makes $4 of earnings per share in 2015.

In the end, Cramer said it all depends on how high Facebook's stock goes when it becomes public Friday. For investors who can’t get in on the deal, he thinks there will be a better time to buy than Friday, but they have to be patient.

“Lots of big institutions will be able to buy on the deal and then buy in the aftermarket. If they get 100,000 shares at the IPO price and a 100,000 at the opening price, they will still have a pretty good basis,” Cramer explained. “But if you can’t get in on the deal and just buy the opening price, you will not have a good basis.”

So what’s the bottom line?

“If you can get in on the Facebook IPO, do it. This could be among the greatest growth stories of the era,” Cramer said. “But is it worth buying in the aftermarket? The only answer I can give you is that it depends. At $50 it could be a bargain, but if it spikes to $80 I’d stay away."

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