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If Facebook Is Worth $100 Billion, Google Looks Cheap

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Facebook IPO upstages earnings season on Wall Street.

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The latest quarterly earnings season continues to be the dominant influence on Wall Street, but a few other events have imposed and impacted trading in media and communications stocks. In particular, the Facebook IPO filing has taken center stage. Facebook will not begin trading for a couple of months, but an active market for the shares in private transactions strongly suggests that when it does come public, it will be valued at near $100 billion.

Growing more than 50% annually with $3.5 billion in revenues and over $1 billion in operating profit, $100 billion is extremely generous but probably about right given historic valuations of major Internet IPOs. I have received a lot of questions from friends and clients about buying Facebook, but with the stock likely to rise sharply from its IPO price, taking the valuation well north of $100 billion, it is hard to make a recommendation.

Basically, until it starts trading, we do not know what price you will pay for Facebook. Unless you are very wealthy and an important client of one of the underwriters, you will not be able to buy Facebook at the IPO price. I would buy it at the IPO price but probably not too much higher.

One stock I would buy based on Facebook's IPO is Google (GOOG). Google is valued at $195 billion but has about $45 billion in cash. If Facebook is worth at least $100 billion, what is Google worth? Google is not growing nearly as fast as Facebook but did manage 25% revenue growth in its most recent "disappointing" quarter; 25% growth is nothing to sneeze at for a company that is 10 times the size of Facebook.

Valuing stocks is subjective, but I think it is fair to believe that if Facebook is valued at $100 billion or more, Google is worth a lot more than $200 billion. Investors seem to agree as the Facebook IPO filing coincided with the bottom in Google shares following its slide on the earnings report. Google shares have rallied about 8%. I think upside to over $700 is easily doable if the company reports just an in-line clean quarter at its next report in April.

Another winner off the Facebook IPO has been Zynga (ZNGA). I bought a small amount of Zynga just below its offering price of $10. The shares soared about 30% after Facebook's filing indicated Zynga represented 12% of Facebook's revenue in 2011. Since Zynga provides two revenue streams to Facebook, a share of Zynga's own revenue and advertisng time Zynga buys on Facebook, it is hard to say if the 12% figure confirms that Zynga's December quarter was better than expected.

Certainly, that is one interpretation. I believe the more important takeaway is that Zynga is quite important to Facebook. Lots of bears on Zynga note its reliance on Facebook and Facebook's ability to hurt Zynga. I think the IPO filing reminded investors that Zynga is relevant and important in its own right, independent of Facebook. Zynga is a sizable company and quite profitable. With less worry about Facebook, valuation of Zynga shares expanded.

In another news story of interest to media investors, Verizon (VZ) and Coinstar (CSTR) announced they will enter a joint venture to offer a nationwide streaming service similar to Netflix's (NFLX). Given that Netflix is spending several billion to secure content, the impact of the new JV is likely to be determined by the parties' willingness to spend heavily on content rights. I am not sure whether this deal is good for Coinstar and Verizon, but it surely seems good news for Hollywood content suppliers, who now have another deep-pocketed buyer of film and TV streaming rights to join Netflix and Amazon (AMZN).

Shifting back to earnings, later last week we heard from Qualcomm (QCOM) and Viacom (VIA). Qualcomm had extremely strong results and raised its guidance. More than any company but Apple (AAPL), Qualcomm is at the center of the mobile broadband revolutions. The company's results confirm the bullish investment thesis surrounding mobile broadband.

Viacom reported disappointing results, highlighted by advertising growth of -3%, well below recently lowered forecasts for flat to slightly up. Management softened the blow by noting that growth was back in positive territory for the March quarter. Viacom suffered in the fourth quarter from poor ratings at several networks. In particular, a large decline at Nickelodeon was a problem. Management also noted weak scatter volumes after Thanksgiving.

Looking ahead, scatter volume has picked up and pricing is holding at premiums to both last year and the upfront. Until we hear from other TV network owners, it is hard to get a handle on the state of the TV ad market. Disney (DIS), Time Warner (TWX), and Scripps Networks Interactive (SNI) report this week. These companies offer a mix of ratings performance, so their commentary should provide a better picture of where things stand.

I continue to believe that the national TV ad market has merely returned to normal after the huge bounce off the deep cyclical bottom in early 2009 ran its course. For now, investors worry about developing weakness. If my thesis proves correct, investor sentiment will improve and be bullish for media stocks.

Disclosure: Google, Zynga, Qualcomm, and Viacom are net long positions in the Entermedia Funds. Scripps Interactive is a net short position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds. Google and Qualcom are widely held by Northlake Captial Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment advisor.

This column was previously published by SNL Kagan on www.snl.com.
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No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

The information on this website solely reflects the analysis of or opin= ion about the performance of securities and financial markets by the writer= s whose articles appear on the site. The views expressed by the writers are= not necessarily the views of Minyanville Media, Inc. or members of its man= agement. Nothing contained on the website is intended to constitute a recom= mendation or advice addressed to an individual investor or category of inve= stors to purchase, sell or hold any security, or to take any action with re= spect to the prospective movement of the securities markets or to solicit t= he purchase or sale of any security. Any investment decisions must be made = by the reader either individually or in consultation with his or her invest= ment professional. Minyanville writers and staff may trade or hold position= s in securities that are discussed in articles appearing on the website. Wr= iters of articles are required to disclose whether they have a position in = any stock or fund discussed in an article, but are not permitted to disclos= e the size or direction of the position. Nothing on this website is intende= d to solicit business of any kind for a writer's business or fund. Miny= anville management and staff as well as contributing writers will not respo= nd to emails or other communications requesting investment advice.

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