Sean Udall is the author of the TechStrat Report, a tech focused newsletter. The following is a free sample. Take a free trial!
So far, aside from the social media names to feed at the public trough, the Facebook
(FB) effect has yet to be largely seen in the markets. That is until today.
I've been table pounding about Google
(GOOG) for many reasons (for its Chrome, Docs, Search, Cloud, Android, valuation, etc.), but certainly as a strong play given the Facebook catalyst. Today the stock is jumped $15 early on and I think much of the action is due to Facebook increasing the number of shares allocated by 20-25%. This effectively just boosted the Facebook valuation from the $100 billion area to around $125 billion, and I now think the market is thinking what I've been thinking for some time: Facebook is going to zoom
past the $150 billion mark and possibly hit something closer to $185 billion the first day. I've penned a ton of work on Google, and not that it needs another valuation catalyst, but if Facebook trades at $200 billion, then Google should trade at or above $300 billion. Or said another way, at 6.5x sales versus Facebook at 50x sales.
I covered my Microsoft (MSFT) short largely because of the coming Facebook IPO. Mr. Softee is probably the easiest call for a little bit of upside on a big Facebook run. Simply put, Microsoft bought a nice chunk of Facebook years back at a valuation under $10 billion, so Microsoft is set to make a very nice chunk of change on this investment.
Nearly everyone knows that Zynga (ZNGA) is a primary benefactor of the Facebook IPO, and so far the most successful company at monetization from the Facebook platform. I can see strong potential catalysts for the FarmVille creators, and also feel it could see a strong delayed reaction move to a big rise in Facebook. However, I have not personally been able to pull the trigger on the long side here. See Electronic Arts (EA) below.
Personally, I'd rather own this cash-rich and very undervalued gaming franchise instead of Zynga. It's sporting just a $4.5 billion valuation versus $6.5 billion from Zynga and has a quarter of the market capitalization in net cash. I also very much like EA's strong growth in digital revenues and feel it could find ways to monetize gaming on several social platforms, including Facebook's.
This stock has been hit by myriad negative news items and has been lumped in with what I deem as too many weak-handed, hot-money players. But I can't find too many companies doing as much direct business with Facebook as Fusion IO (FIO). In recent quarters, Facebook has been Fusion's number one or two customer -- Apple (AAPL) is the other. Facebook relies on Fusion's storage memory platforms for data decentralization to manage its ever-growing mountain of data -- the lifebood of revenue production for the company.
Does anything justify Apple's valuation in the $500 billions and beyond more than a Facebook trading close to or above $200 billion?
The more Facebook can justify its data value proposition to advertisers the more it can sell to those advertisers. ComScore (SCOR) provides digital analytics solutions that help companies do just that. The company combines deep insights into consumer behavior with information regarding usage of their online properties and those of their competitors. Additionally, comScore has intensive analytics on mobile networks which Facebook has said is the next major growth frontier, as well as primary future risk for the company.
In summary, I don't feel a huge need to invest in or trade the Facebook deal. There are plenty of stocks that are currently trading at compelling valuations and which will trade much stronger if the Facebook stock goes absolutely to the moon. If that happens, I will simply sit back and let Google and other positions work as tertiary plays.
However, if there's enough fear or negativity and Facebook opens flat or just modestly higher, I will be taking a stake as I think the company is poised to put in substantial growth for an extended period of time and trade closer to that $200 billion valuation level.
The Facebook Effect: Valuation
After the IPO: A Strategy For Trading Facebook
Author holds positions in GOOG, AAPL, FIO, EA, EMC
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