FacebookA look at various aspects of Facebook to determine if their stock is a buy, hold, or sell.
Facebook will, undoubtedly, be the biggest thing to hit the stock market since Google. Therefore, it is worth investing in before it releases its IPO. You could still make money at the IPO, as people did with Google. However, it’s best to begin yourrace before anyone else has a chance to start. Some are afraid that there is another bubble in the works: 1) “social networking is a fad” 2) “Facebook is overvalued” 3) “there’s no way Facebook can be as valuable as Boeing” 4) “too good to be true” 5) “Facebook isn’t the next Google”
1) “social networking is a fad”• Response: – Really? When will people not find the need to connect with family and friends? When will you not want to find out about the other parties that went on last night? When will employers not want to creep on employees? When will people not want to share photos & videos? – Not in the foreseeable future. Note: it is impossible to refute this claim with any solid evidence. By the same token, it is impossible to back up this claim with solid evidence.
3) “there’s no way Facebook can be as valuable as Boeing”• Sure there is. People can think it’s more valuable.
4) “too good to be true” 5) “Facebook isn’t the next Google”• Facebook isn’t the next Google. It’s better.• Most people would have said, in 2004, that there would never be a site that would have 800,000,000 users. A mere 7 years later, it has become reality.• Facebook is just as valuable as Google because the average user utilizes both each day.
Five reasons why one man isn’t not buying Facebook(guess what? One of them is that he doesn’t have the mula. Go figure.)
Reason #1: Someone who knows a lot more than I do is selling. While the identities of the specific sellers remain unknown,the current consensus seems to be that most will be from venture capital investors like Accel Partners, Peter Thiel, andGreylock Partners. Maybe Mark Zuckerberg will kick in $50 million or so himself, just for some fooling around money.But its not a dilutive primary offering from the company. "Facebook needs no cash!" say its cheerleaders. Okay, fine. Letsjust say for arguments sake that it is early stage investors who are selling. Why would they sell? Because theyre in need ofcash to invest somewhere else? The way the social network is talked about these days, its the best investmentopportunity in town. So why would anyone want to forsake it? And dont give me that crap about VCs being "early stage"and wanting to cash out of a "mature" investment. These people are as money hungry as any other institutional investor,and would let it ride unless….they saw something that suggested that the era of stupendous growth was over.Facebook reached 500 million users in July. Theres been no update since, even though the company had meticulouslydocumented every new 50 million users to that point. Might the curve have crested? And lets not even talk about the factthat they dont really make much money per user — a few dollars a year at most. (Its estimated $2 billion in 2010 revenueswould amount to $4 per user at that base.) I certainly havent spent any money on the site, despite being a fairly regularvisitor. And any advertiser who is trying to target me on the social network is wasting their money. But thats just me. Response: I think the shareholders that are selling are just too antsy to wait for the IPO. As for Facebook’s user growth….800,000,000 is a great number. That’s almost 1/8 of the whole population of the world, and almost ½ of the Internet using community.
Reason #2: Goldman Sachs. Ive got nothing against Goldman Sachs. Hell, I worked there. But when Reuters FelixSalmon says that the Goldman investment "ratifies" a $50 billion valuation, hes only half right. That is, someone,somewhere—perhaps the Russians at DST Global—might just believe this imaginary number. (Its hard to see why,though: DST got in at a $10 billion valuation in May 2009. Facebooks user base has more than doubled since then. Soits valuation should…quintuple?) But concluding that Goldman Sachs believes in a $50 billion valuation is poorreasoning. As Salmon does point out, Goldman has likely earned the lead book runner slot in any initial public offering.Consider a 20% sale of the company in such an event – or $10 billion at todays "valuation" – and a 2% underwriting feeof $200 million. Goldman would have to share such spoils, so lets call it $100 million into their pocket. Subtracting thatunderwriting fee from the Goldman investment, and you could easily make the case that for a net purchase price of$350 million, Goldmans ante only values Facebook at $39 billion. Hey, thats just off by $11 billion, so dont worryabout it. Buy your shares where you can get them. In other words, go open a $10 million minimum private clientaccount at Goldman Sachs. (Who says Goldman didnt learn its lesson about shafting its own customers? This timearound, theyve managed to get the customers to line up the shaft themselves.) Response:……Goldman is positioning itself to be the primary underwriter of Facebook’s IPO. Plain and simple. They’re finally trying to get something right.
Reason #3: Zynga. For all the success of the largely-Facebook-hosted games of Farmville and Cityville,its hard not to wonder what the success of the anachronistic game maker Zynga really means. Dopeople really miss their Atari that much? I doubt theres any crossover between the people playingFarmville and those playing the technologically advanced Call of Duty: Black Ops. Which is fine – to eachhis own. But all the Zynga games make me think about is Wal-Mart (WMT). Which is also fine – theresnothing wrong with being compared to one of the worlds most successful companies. But heres thedisconnect: if Facebooks future success depends on aiming for the lowest common denominator withthe most people possible, that implies pretty slim margins a la Wal-Mart. You think theyre going tojustify a $50 billion market capitalization through banner ads? Are you kidding me? Response: Fuck Zynga. Facebook is worth what it’s worth. I would be willing to pay up to $800,000,000,000 for Facebook. There, I said it.
Reason #4: The niggling details. Important question: Just what are Facebooks numbers? Importantanswer: Who the hell knows? In November, Zuckerberg told the world not to hold its breath for an IPO.No worries, Mark, because Im not. Google (GOOG), if you recall, was pretty open by the end of its lifeas a private company – everybody knew what it was doing and how it was doing it. Facebook (and, inthe same sense, Twitter) reminds me of Kozmo.com during the dot-com boom. Kozmo, you will recall,somehow had people convinced that they were going to make tons of money doing somethingremarkably pedestrian – that is, delivering Ben & Jerrys by bicycle to Manhattanites. (I remembersitting in the offices of Flatiron Partners way back when. Someone ordered some ice cream on the Web,and – voila! – half an hour later some delivery guy shows up. Kind of like what would happen if youcalled the deli on the phone. The future was ours to see!) Facebook reportedly pulled in $2 billion inrevenues in 2010. I dont know about you, but Im disinclined to pay 25 times revenues for anything, letalone a company the finances of which I know pretty much nothing about. Response: Yes, Facebook enjoys its privacy. Is there a problem with that? It simply shows that they are a company that doesn’t have to give a shit what investors think. Making them more valuable.
Reason #5: Warren Buffett. The legendary investor cautions those looking at outsizevaluations to consider ones purchase of company stock in a different way than price of anindividual share, whatever it may be. He suggests one look at the total market valuation – inthis case, a sketchy $50 billion – and to consider: Would you buy the whole company for thatprice, if you had the money? The market value of Goldman Sachs is just $88 billion. Id takemore than half that company over the whole of Facebook any day of the week. I bet WarrenBuffett would too.Response: As stated before, I would be willing to pay $800,000,000,000 for Facebook.
• Think about it: – Myspace started 2003, Facebook started 2004. One failed, the other thrived. – Google started 1998. They went public in 2004. They are still going strong. – Facebook, if its IPO is late 2012, will be one year later than Google’s timeline. If anything, its not rushed.
Number of users of various social networking services STOP! Look around you. How many people that you can see do you think have Facebook?As we can see by Exhibit A, 800,000,000 people worldwide utilize Facebook. This is roughly 1/8 ofthe entire planet. Facebook has staying power. It would take almost the intervention of God tochange Facebook being number one. By the very fact that they have so many users, they make ithard for serious competitors like Google+ to compete because everyone’s friends are onFacebook. And Google is good at doing searches. They think that just because they have brandname power that they can play the social networking game. There is a reason Facebook isnumber one. They do one thing, and they get it right.
Facebook Projected RevenuesWe see that in 2010, Facebook’s revenue was $2.0B. It is estimated thatby 2015, it will have grown to $12B. This represents a Compound AnnualGrowth Rate (CAGR) of 43% over the 5-year period.
The Bottom LineIt is debatable whether Facebook is a buy. But I would say it is a buy based solelyon its intrinsic value. Who won’t want a piece of the most populous socialnetworking site?I cannot invest in Facebook, pre-IPO. I am not an accredited investor: not worth$1,000,000 and don’t make $200,000 a year.However, Austin College’s Student Managed Investment Fund is worth $1,000,000.It might require some fancy money sorting, to get approved, but I think it would bewell worth it.I would suggest an investment of $25,000. Assuming $35 per share, this would getthe Investment Fund 714 shares.I would suggest holding onto it until it is worth $100,000. This assumes that shareswill eventually be worth $140. Google is roughly $550.