"I'm rooting for Facebook, I really am, but this is one IPO investors shouldn't touch."
That blunt comment from Conor Sen, a Minyanville contributor, private investor, and former hedge fund manager, sums up much of the sentiment elicited from our community of Wall Street professionals last May when we published 10 Takes on the Facebook IPO From Investing Experts.
Now, nearly six months later, the stock is trading at half of its IPO price. So where does Facebook go next? Is it time for the skeptics to jump in? We went back to our panel to find out.
As you watch Mark Zuckerberg speak at the TechCrunch Disrupt conference today, keep these sharp criticisms -- and reasons for optimism -- top of mind.
At $18ish, Facebook Now Fairly Valued
By Conor Sen
When we first brought up Facebook, I wrote, "Growing revenues at 30-40% per year would be terrific for most businesses, but in this environment that should command a multiple of more like 6-8x sales, not 20-25x.
" Let's do the math on that. Assume around $5 billion in revenues this year. Six to eight times that would be $30 billion - $40 billion. Tack on the $10 billion in cash the company has and that gets you to a market cap of $40 billion - $50 billion. With 2.76 billion fully diluted shares outstanding, that gets you to a price of $14.50 - $18/share. We're around the upper band of what I'd consider fair value.
From here, factors to take into consideration include the overhang from insiders selling their stakes between now and the end of the year, and the possibility of the business getting better or worse over the next several quarters or years. In other words, fairly typical concerns for any newly listed stock. In the near term, I think the supply worries will keep the stock from appreciating too much, but we're approaching the level where longer-term value investors should get interested. And it's possible that it will be included in the Nasdaq 100 in December, which would create new demand for the stock.
Bottom line: At these prices, I'm moderately optimistic on Facebook.
(Position in FB derivatives)
Conor Sen is currently a private investor, and recently spent more than four years at a multi-billion-dollar West Coast-based hedge fund. Follow him on Twitter at @conorsen. Find his recent articles for Minyanville, here.
Why Didn't I Short It?!
By Fil Zucchi
With Facebook's stock now at $18, the first thing that jumps out at me is that I should have shorted the heck out of it rather than just watching it plunge. Regrets aside, I continue to think that Facebook's morphing away from its current use and more toward a "commerce" concept will take a long time and is hardly a sure thing. The sentiment around the stock is hideous, so a bounce is always possible. But all things being equal, I'm not really interested in getting long until this one is a single-digit midget. At those prices, there is probably enough in the "name" alone to act as a cushion as the business shakes out. I'm watching puts prices for no cost ratio spreads that would get me long at $10, but so far there is nothing really interesting.
Fil Zucchi is the founder and manager of Zebra Investment Advisors LLC, a Virginia registered investment advisor, and Zebra Fund, LLC, a long/short hedge fund. Look for his recent stories, here.
Waiting for More Clarity
By Steve Birenberg
As noted pre-IPO, I was only interested in Facebook for a trade off the IPO. I did a small trade on the long side. I took a partial profit on day one and wiped that out and then some when I sold the balance at $29. Good lesson here in that I let a trade become an investment. Dumb. Fortunately, it was small relative to my Entermedia hedge fund.
At the time of the IPO, I correctly identified the efficacy of Facebook's website advertising and the shift to mobile as the key issues. I indicated there was enough uncertainty surrounding these issues and the impact on user experience that I thought the stock was not a good investment in light of the very expensive valuation. I said I'd stick with Google
(GOOG), which is my fund's second largest long position, and cheaply valued. Good call there as Google has finally begin to move up to the $750 plus target I have long maintained.
With Facebook at half the IPO price, I still think it is expensive and I still see the major issues as unresolved. I am not a buyer yet. I think
the time to buy will be when the company reports accelerating growth with successful metrics related to mobile advertising. An additional issue that has cropped up is rapid expense growth, so I'd like to see some progress here as well. (Google went several years dealing with a series of issues before finally regaining investor confidence -- not sure about the timing, but I think the research/quarterly results/investor reaction to Google over the past few years is a good parallel for what Facebook shares face.) During the quarter when all this happens, the stock will pop a quick 10% - 20% before anyone gets a chance to buy it. I'd rather pay up 10% - 20% with more clarity that the business model can work than make a bet that it going to eventually work and buy Facebook shares today.
Disclosure: Position in Google.
Steven Birenberg is president of Northlake Capital Management, an SEC-registered investment advisor utilizing a unique strategy combining index ETFS and media and communications stocks. Birenberg is also co-owner and co-portfolio manager of the Entermedia Funds, long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Read Steve's articles for Minyanville, here.
By Chris Dixon
Let’s look at some numbers. For the second quarter, annualized revenue of $4.96 per user was up 2.4% from $4.84 a year earlier as monthly users increased by 29%, resulting in a perfectly respectable revenue gain of 32%. The user base of 955 million is on track to surpassed 1 billion by year end, putting the company at a revenue base approaching $5 billion. Applying an operating margin of 43%. (before share based compensation) puts the company on track to generate $450 million in EBITDA, and perhaps higher if margins can return to pre-IPO levels. With net debt of $9.5 billion (cash less capital lease obligations) and assuming a traditional media valuation multiple of 14x to 18x, Facebook equity would be valued at $16 billion to $18 billion. At the end of the quarter, there were 1.879 billion shares out, and it is unlikely that there is significant additional dilution from options given the drop in valuation. Putting it all together translates to a fair value (based on media industry comparables) at year end of $8.50 to $11.per share. Given the hype and potential emergence of bottom fishers, the stock may not trade to those levels. But when viewed against Google, which trades at 12.2X, or Apple
(AAPL), which trades at 10.X trailing twelve month EBITDA, there is little reason to rush in just yet.
Disclosure: Position in AAPL.
Chris Dixon has over 30 years experience in operating and investing roles in the media and entertainment industry. He served as strategic advisor and managing director, media investments, for Gabelli Group Capital Partners where he focused on investing in privately held emerging media companies. He is currently Minyanville's Non-Executive Vice Chair.
The Brand Is Extremely Relevant. The Model? Not Yet
By Lloyd Khaner
Let's start with the fact that I don't own the stock. That said, what does ring my bell a bit is the substantial power of the Facebook brand
and its close relationship with its worldwide users. To date, the company has monetized its brand by sharing revenues with game providers on its site and more importantly by selling advertising. My questions: Will there be other significant revenue drivers for this company, and separately, how effective are the advertisements that companies place on Facebook? If at the end of the day, this is an ad-driven business model with global reach, then the valuation will reflect that. I believe the jury is still out on the ultimate driver of Facebook's revenues and profits -- and that's why there is confusion on what the stock's multiple should be, hence the volatile stock price. But back to my original and most important point: The Facebook brand strikes me as highly relevant to its nearly 1 billion users and like I said earlier, that does and will continue to ring my bell a bit.
Lloyd Khaner is the General Partner of Khaner Capital, LP, a long-short hedge fund based in New York. He is also the author of Lloyd’s Wall of Worry, published every Tuesday on Minyanville. Check out Lloyd's recent columns, here.
How Much More Will Mobile Cost? And When Will Zuckerberg Hand Over Control?
by Peter Prudden
Since the IPO that led to a near term top in the market, Facebook has done nothing but grind lower. Over-hyped and under-delivered is how you could classify this market event, but we told you to stay away because the broader market was unstable and due for a rinse. Couple with that a deal price that was elevated from $28 on the top end to $38, and a larger insider sale added on at the eleventh hour. The insider gate has once again been lifted and we are seeing many early investors take the money and run. As they should. The cost basis of the angel crowd and their subsequent return warrants cashing in the bet and moving on to the next opportunity. What should the retail and institutional crowd do? Tough question. My gut says ignore it because uncovering value is an evolving cycle and value will always come to the surface. If Facebook was a true superstar, it would have traded like LinkedIn
(LNKD) out of the gate, and not Groupon
(GRPN) or Zynga
(ZNGA). The key question you must answer from a longer term investment thesis is: How much will Facebook need to spend on mobile Web/ad development? It's eating up the company's earnings and there's no end in sight. Another question: When will Zuckerberg give up the reins? He can't manage the business to the Street's standards and likely never will. From a shorter term trading standpoint, you can be long against the recent low, as hot money will come back in with a close above $20.
Peter Prudden is the General Partner of SISU Advisors LP and the Managing Member of Prudden & Company LLC. Read more of his comentary, here.
Fighting With Reality: No One Would Ever Pay to Use Facebook
by Michael Sedacca
Facebook is and has been at the forefront of creating new social media initiatives. However, it's becoming clearer that Facebook went public at or near its peak in terms of growth. Yes, Facebook is still growing, but not at the exorbitant rates that the stock was implying.
It's a widely known fact that almost all of the restricted stock that will become available will be dumped on the market. The float will grow from its initial size of 470 million shares by almost 2 billion shares, which will be a growth of nearly six times. Will there be enough buyers to absorb all of the new supply? My inclination is no, but the amount of new supply that's still coming has already been discounted by the market.
One thing that has struck me in my recent conversations is that Facebook would likely not be able to survive on a pay-per-use model. Those I have asked have nearly universally said that even if they had to pay $1 to use Facebook, they would not. This underscores Facebook's fight to stay relevant, where LinkedIn has thrived off a pay-per-use model.
Given the expected increase in Facebook's tradable float to 2.4 billion shares, I could see a bottom for Facebook's stock in the high single digits, but that is just an opinion, not a market call.
Michael Sedacca edits Minyanville's Buzz & Banter. Read his recent stories, here.
Facebook is still filed under "What's the Point?" in my mental filing cabinet.
Here's the thing: If in fact Facebook is on the verge of becoming an Apple- or Google-like growth story, then I can afford to wait until the metrics start turning. If Facebook is the next big thing, then that implies a multi-year success story giving investors plenty of opportunities to jump on board.
But until then, I don't see any point in jumping in a stock that looks like it could crumble under $10 (yes, I said under $10) on a lousy quarter. Facebook is trading at 30 times next year's consensus earnings estimate.
Should Facebook disappoint once again, there's no reason that multiple can't go to 20 or 15 or even less. And in that scenario, that multiple would be placed on lower earnings estimates, resulting in Double-Costanza time (simultaneous shrinkage of multiple and estimates) at a level we haven't seen since Netflix's
(NFLX) 2011 flop.
On the same token, should Facebook's new advertising initiatives start to take off, particularly in mobile, the stock is likely to rapidly climb back towards its $38 IPO price (yes, I said $38).
Fortune may favor the bold, but since my stomach can't handle the bumpy ride, I'm happy to watch Facebook from the sidelines. It's just too hard!
Michael Comeau edits Minyanville's Buzz & Banter, and is also a regular columnist on Minyanville.com, focusing on technology and consumer stocks. Read his recent articles, here.
Destined to Take Second in Mobile, Facebook's Reward is Coming
By Sean Udall
First, is it any wonder that "Facebook CEO Mark Zuckerberg Won't Dump Stock for 12 Months
"? I'm not surprised by this announcement at all. I'm also not surprised to see the stock responding, though it's pretty muted thus far. In short, I think I'm on the right side of this name and I have Gene Munster on my side. I also think the vast majority of the $20 - $25 targets (and lower) on Facebook will be scrambling hard in the coming weeks/months. To me, this echoes the action in Fusion-io
(FIO) as many analysts lowered targets just because that stock price was falling. In my view, the worst reason for a price target adjustment is due to a stock's price action. Yet that's why most of the adjustments occur. I remained convicted in my thesis that Facebook will exhibit a strong number two position in mobile ad/geo location based advertising behind Google, and the stock price will be rewarded accordingly in the future.
Moreover, I have long thought that most are asking questions when analyzing this stock. Here are mine:
What if the company gives me and other business users a reason to use it? What is the stock worth then? I'll note the industry groups that use blogging as an active strategy say the Facebook link-throughs are without equal.
Isn't Facebook going to be a lot more powerful on the R&D front with $11 billion - $12 billion in cash, rather than $1.0 billion -$2.5 billion?
How hard would it be for Facebook to enter and really hurt the competition in the professional job board market?
Is the pending IPO lockup expiry important, or is it actually the amount of shares that insiders choose to unload?
Are we not approaching the release or announcement of the release of the Facebook phone... oh, I mean, the iPhone 5.
What is the potential for a Facebook launch in China?
Bottom line: For me, the question of the "success" of Facebook was never the major issue. It was always about valuation. As stated some months back (before the IPO), at $155 billion - $170 billion or higher, it's likely a huge short. But now, at around a quarter of that figure, it looks just the opposite. Positions in GOOG, FIO, FB.
Sean Udall is an Investment Strategist, Portfolio Manager and Proprietary Trader with extensive experience across a wide variety of asset classes, including equities, fixed income, currencies and derivatives. He’s a recognized trader, prolific writer and the founder of the TechStrat Report, a Technology Focused investment newsletter at Minyanville. Read more of Sean's commentary, here.
Social Mood Suggests Facebook Has Limited Upside
by Peter Atwater
In Moods and Markets,
I talk about how you often see acts of sacrifice at major bottoms, and I couldn't help but wonder on Tuesday whether Mark Zuckerberg's formal announcement
that he would not be selling shares fit that definition.
Peter Atwater is the President and CEO of Financial Insyghts LLC. Through Financial Insyghts, Peter helps his clients better understand the issues affecting the financial services industry (particularly credit, regulation and accounting) and their impact on the economy.
He is also a frequent contributor to Minyanville; read his recent articles, here