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Bilifuduo (98.20)

The Face Value of Facebook

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February 05, 2012 – Comments (2) | RELATED TICKERS: GRPN , AAPL , GOOGL

In retrospect, would you have invested in the Gutenberg press when it first came out? Would you have funded Alexander Graham Bell when he was awarded the first patent for the telephone?

These inventions became the very symbols of communication for centuries to come. They have become quintessential examples of human ingenuity that have facilitated the communication of ideas for entire generations.

Well, Facebook is the modern-day version of the Gutenberg press and the telephone. Combined.

483 million people log into Facebook every day, 845 million users log into Facebook every month, and Facebook is quickly nearing the magic number: one billion users. This single site has connected the world and revolutionized communication in seven years. And now it is about to launch the biggest IPO in history, one estimated to immediately peg the value of the company at $75 to $100 billion dollars. This astounding valuation is estimated to instantaneously create 1,000 new millionaires at the company, boost Zuckerberg's net worth by billions of dollars to at least $20 billion, and even help California close its budget gap by providing a huge pop in capital gains revenue. Investors are eagerly scouring Facebook's S-1 filings to get a closer look at the company's margins and revenues and Facebook is expected to become listed in NASDAQ around May. Investor anticipation for Facebook's IPO is gaining traction, and many have already dubbed Facebook's going public as "the IPO of the decade." Of course, this leads to the obvious question: should you buy into Facebook?

No.

Critics will say no, arguing that Facebook is heavily overpriced. They will point out the odd fact that Facebook will launch will approximately $5 billion in stock float when their valuation is around $75 to $100 billion; if Facebook is confident in their share prices, why won't Facebook increase the amount of shares publicly owned and available for trading? Critics will also point out the relatively lackluster performances of several recent IPOs of tech companies, especially those of Groupon (NASDAQ: GRPN), RenRen (NYSE: RENN), LinkedIn (NYSE: LNKD), and Pandora (NYSE: P), which have tanked 19%, 70%, 23%, and 25% since their IPO, respectively. Facebook has an operating margin of approximately 39.74%, one which is relatively slim compared to those of other tech companies such as Apple (NASDAQ: AAPL), which has a 44.12% gross margin. Critics will argue that the hype around Facebook will amount to another dot-com bust the likes of which crippled the stock market in the early 2000s. As Richard Harris, Chief Executive at Port Shelter Investment Management, notes, "It [Facebook's IPO] reminds me of the huge dotcom bubble and this does seem to be harking back to the days of craziness where valuations are really high. But Facebook is a darling; everybody loves it, all the kids are on it and that's one of the reasons we're looking at valuations like this." Opponents of investing in Facebook will also point out the proliferation of competitors such as MySpace and Google+ in the social networking industry; they argue that the relative ease of starting a social media network will result in multitudes of competitors seeking to replicate Facebook's success and thus hampering Facebook's efforts to expand. In its S1 filing with the SEC, Facebook listed innovation from Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), and Twitter as risk factors and critics argue that competition with these fellow internet giants could negatively impact Facebook's bottom line.

Yes.

Investors eager to get in on a share of Facebook action will point out the the hype around the stock, although potentially damaging in the long-term, will result in huge short-term gains. Indeed, the very prospect of a Facebook IPO has initiated huge impact waves in the investment world. Shares of Zynga (NASDAQ: ZNGA), an appmaker which commands 12% of Facebook's business, soared more than 13 percent in 2012. The company makes such Facebook draws as Farmville and MafiaWars. Meanwhile, Chinese social network RenRen has reversed its slump and soared 50 percent so far this year, riding on increased investor interest in social networking plays, an interest catalyzed by the Facebook IPO. Even stocks of equity funds that already hold Facebook shares are prospering. GSV Capital Corp (NASDAQ: GSVC) holds 350,000 Facebook shares at a cost basis of $29.90, and is up 20 percent this year. Morgan Stanley(NYSE: MS), which is currently winning the huge investment bank brawl over being the lead underwriter of the Facebook IPO, is up 28 percent this year; the winning bank will generate approximately $250 million in fees. Supporters of investing in the Facebook IPO point out that if the tangential impact of Facebook's IPO is this massive, the actual impact on Facebook stock will be exponentially greater. Moreover, they argue that although starting a social media network is easy, populating it with enough users to ensure an experience similar to that of Facebook is extremely difficult. Proponents of investing in the Facebook IPO point to the declining state of MySpace and the lackluster performance of Google+ as proof that Facebook will continue to dominate the sector as it nears the billion-user mark. Facebook has also seen significant growth, as shown through its recent S1 filing with the SEC. Facebook's annual revenue grew 154% from 2009 to 2010 and 88% from 2010 to 2011, exhibiting positive signs of continued growth. Facebook also experienced a 42% increase in ads delivered in 2011, and ad revenue increased to $3.2 billion in 2011 compared to $1.9 billion in 2010. Moreover, Facebook experienced a 500% growth in payments revenue in 2011, a strong sign of the strength and innovation of Facebook's advertisement integration.

So what is the true face value of Facebook and its stock? This question depends mainly on whether or not investors, individual and institutional, believe in Facebook and its future.

Supporters of Facebook will point out that Facebook has completely revolutionized communication in the 21st century

Critics of Facebook will wonder if this revolution is overpriced and unsustainable. 

2 Comments – Post Your Own

#1) On February 06, 2012 at 8:46 AM, Frankydontfailme (27.20) wrote:

Revenues are revenues, and facebook has serious profit potential. But the Gutenberg press? That's more than a bit of a stretch. It's a more popular and less creepy myspace. 

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#2) On February 06, 2012 at 9:52 AM, Turfscape (44.18) wrote:

"In retrospect, would you have invested in the Gutenberg press when it first came out? Would you have funded Alexander Graham Bell when he was awarded the first patent for the telephone?"

And the folks who invested in Facebook when it first came out will indeed be sitting pretty on top of a huge pile of money. The problem, though, is that we are now 10 years late to the party. Facebook is no longer a new, unknown commodity. People who go for the Facebook IPO are not investing in something as it first comes out. They're investing in something that is already well-established.

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