10 Expert Takes on Facebook Stock at $19, Half the IPO Price
Is now the time to bite? These investing professionals are not convinced.
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.
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.
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