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10 Takes on the $38 Facebook IPO


Minyanville's top contributors discuss the metrics, technicals, and other factors they considered when sizing up today's IPO. Who would buy, who wouldn't...and why?

MINYANVILLE ORIGINAL "Nothing short of pandemonium." That's how one insider close to the Facebook (FB) road show discussions described investors' response to today's IPO, the largest in tech history.

Late yesterday, Facebook priced its IPO shares at $38 per share, which put the company's valuation at $104 billion, the largest ever for a Wall Street debut.

Hysteria aside, you've probably already made up your mind as to whether you're in or out. But how did other serious investors come to their conclusions?

In our conversations with the traders and money managers who write for Minyanville, we've found anything but a consensus about what to think of the Facebook IPO. Interestingly, however, no two experts have the exact same concerns about the offering. How a person sees this IPO is revealing of how a person sees investing in general, and in the case of our experts, whether one reads the markets through the filter of social mood (Peter Atwater), pure metrics (Chris Dixon), technical analysis (Peter Prudden), or the habits of one's teenage daughter (Fil Zucchi).

Here we present 10 unique perspectives on the Facebook IPO. We invite you to give each opinion your consideration and then leave us your comments. What do you think will happen after today's bell, in the days following this historical market offering, and over the course of this Web 2.0 era?

Don't Touch This
By Conor Sen

I'm rooting for Facebook, I really am, but this is one IPO investors shouldn't touch.

It's not about the hoodie (good for him!) or Mark Zuckerberg's age (Dell, Gates, and Jobs all had high-profile companies at younger ages), or social networking being a fad (it's not). It's two things:

1. Facebook's recent quarterly numbers do not show the type of growth that companies looking to command a 20-25x sales premium should show. 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. Perhaps the law of large numbers is already catching up to Facebook. After all, revenues were in excess of $4 billion last year. Or, more likely...

2. Facebook isn't run as a profit/revenue-maximizing company. Mark Zuckerberg said as much in his letter to investors: "We don't build services to make money; we make money to build better services." Craigslist and Wikipedia are both fantastic websites, but what would you pay for them as an investor? Surely it will make some money, but with so many well-run businesses out there trading at compelling valuations, why take a flier on a growth company if you're not sure the CEO is in your corner? Why do you think Mark Zuckerberg will treat you any better than he treated Eduardo Saverin?

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.

To Dismiss Facebook as Dumb Would Be... Dumb
By Fil Zucchi

As the father of a 16-year-old daughter, it's very difficult to have anything good to say about Facebook, considering I spend half my time at home telling her to get off the damn thing. But that dynamic captures my take on FB (the stock) pretty well. On the one hand, it's a gigantic vacuum of time that could be spent on otherwise useful activities, but on the other hand, Facebook has penetrated society like no other infectious disease in the history of mankind; to dismiss the service as dumb is . . . well, dumb. My sense is that ultimately management will steer users away from utilizing its platform to "update one's status" every 12 seconds and to "like" mindless items, and toward creating a gigantic clearinghouse for actually useful content targeted with a level of granularity never seen before. That's the only place where, in my inexpert opinion, Facebook will be able to make the kind of money needed to justify its IPO valuation. When that will happen I do not know, but starting off at 25x TTM (trailing twelve months) revenues (based on the IPO price), I'm guessing I may be out of this business well before I'll have a chance to buy Facebook for a price that makes sense.

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.

Will the Efficacy of Facebook Ads Prove Enduring?
By Steve Birenberg

If I could buy Facebook within the revised IPO pricing range, I would. For a trade. I manage money for wealthy individuals. I'm getting calls asking if I could buy some stock for clients, and for clients' mothers!

I don't have a lot to add to the research side of things. There are plenty of good reports already written. I think the key issue is whether the efficacy of Facebook ads proves enduring. Current ads are a weak version of display advertising with good targeting. I think lots of advertisers are allocating budgets toward Facebook because they figure it must be worthwhile. Facebook advertising is going to have to prove itself for budgets to continue to rise.

There's also the issue of the shift to mobile usage. Facebook has a below-average mobile product with no obvious way to display ads that's not intrusive on the user experience. I don't think users have another choice for what they get from Facebook, but intrusive advertising would reduce usage and ultimately hurt the brand such that new user gains would begin to lag. Think Netflix (NFLX) when the brand got tarnished. Mobile is not just an issue for Facebook. I have been short Pandora (P) due to monetization issues on mobile.

Ultimately, I just think Facebook is too expensive at what will be a premium to the IPO price. As a multiple of earnings, revenue, or EBITDA, the stock is just pricey for me. I'll stick with Google (GOOG), which is looking awfully cheap compared to Facebook, especially given steady 20%-plus growth for a fraction of the multiple, leadership in mobile with Android, and a means to monetizing mobile mobile through search.

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.

The Metrics Support the Hoopla, but What About the Multiple?
By Chris Dixon

From a valuation point of view, the key metrics all come down to the revenues per user and projected margins. Based on the S-1, with 2011 average monthly users of 726 million, and $3.7 billion in sales, the company generated average revenues per monthly user of $5.09 per year, or only $0.42 per month, and posted an EBITDA margin of 46.7%. Should the public Facebook be able to augment its monetization model to $0.75 per monthly user ($9.00 annual ARPU) and increase its user base to 1.2 billion, the company would generate a remarkable $10.8 billion in revenue and bring down between $4 and $5 billion to the EBITDA line. These are sufficient growth metrics to support the hoopla, but raise serious questions about an appropriate multiple. Historically, 15 to 20x multiples have been achieved, but are rarely sustainable. So based on that scenario, an $80 to $100 billion valuation would be justifiable, but the company would have a more likely valuation of $60 to $75 billion (12 to 15x) once the smoke begins to clear. Based on 2.3 billion fully diluted shares and $3.9 billion of cash, the stock should trade about $34 a share.

Which raises the bigger question: What happens to other kahunas in the tech world: Apple (AAPL), Google, and and Amazon (AMZN)? In my view, herein lies the opportunity. Anytime a new entrant absorbs $5 billion of equity capital there is massive rebalancing by institutional investors, including ETFs, indices, and a broad array of tech funds. Everyone of these guys and gals will need to own Facebook in their portfolio, and the bigger question will be where they get the cash. If they need to sell some Google, Apple, or Amazon, we can expect to see real pressure on those stocks as tech holders need to build positions in Facebook in the coming weeks. Can you imagine being the head of a tech fund who didn't participate? For those of us who have been looking for an opportunity to add to positions in Google, Amazon or Apple, the time may be ripe. I'm looking very closely at what happens in the coming weeks to those stocks to see if an opportunity can be realized to buy some Google or Amazon on a dip.

Disclosure: Dixon owns 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.

Do Your Own Homework
By Lloyd Khaner

From the anecdotes I've heard in recent weeks, the mom-and-pop retail investor is finally back in the stock market…for Facebook only. As a value investor this one is a stretch for me, so I won't even try to put a future valuation on it. What I suggest is that you cut away all the hype and emotion and focus on two things: competition and pricing.

Competition: Facebook is clearly the biggest and most popular concern in social networking. But -- and this might be news to you if you're over the age of 40 (as I am) -- there are other sites out there competing with Facebook.

Some names include Path, Diaspora, Google+, and a handful in China led by Renren (RENN) which boasts more than 100 million members. You might want to throw in LinkedIn (LNKD) and Twitter, too. My advice: Check out these competitors and see what you think about what they offer. You may like them more, you may not.

Talk to people you know and ask them what they think. Bottom line, check out the competition and if you have nerve, call one of them up and ask them why they are better than Facebook. My experience is that companies might spend an hour talking about themselves, but will always spend a day talking about the competition.

Pricing: Let's not forget that this is about money, not about friends. The majority, if not all of Facebook's revenues to date come from selling advertising space on the site. This is a media company and it competes with other media companies like TV, cable, news outlets, magazines, radio, and entertainment sites for advertising dollars. Check your contacts (a.k.a., your "Rolodex" for the over-40 crowd again) and call some friends in the advertising business; find out how much Facebook gets paid for ads on its site and how that compares to its competitors. Keep in mind that Facebook will likely be offering more paid services on its site in the future, so dig around and try to find out what the services will be and how much Facebook could earn from them.

After you do some competition and pricing research on Facebook you may find that it's even better than you thought it was -- or vice versa. No matter how you come away from your work you will have solid knowledge to base your investment on, and you might even enjoy the process of the seemingly dying art of "investing."

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.

The Market Is Falling Apart, Not Ready for Facebook Shares
by Peter Prudden

Facebook is 4x the share offering that Google was eight years ago. Unlike Google in its pre-IPO stage, however, Facebook has identified how it's going to grow. The company currently boasts $1 billion in net profit and $4 billion in revenue. Google, on the other hand, moved from a 40% market share to almost 90% in its six-year run. Google Search is very profitable, while ad revenue for Facebook is still facing a major obstacle: How can the company make money from ads without disrupting its customer or member base?

Tomorrow's IPO makes Facebook the fourth largest initial public offering in the history of US-based IPOs. Recall that the previous two record-breaking IPOs -- Blackstone (BSL) on June 21, 2007 and Visa (V) on March 19, 2008 -- were timed just as a topping process was ongoing in the major indices. The enormous amount of shares being dumped onto the market with this IPO comes at a time when world markets are staged for a significant downdraft. The market technically topped in February and at this juncture, it seems ill fit to absorb a new float of this magnitude. Internally, the market is falling apart. We are approaching a top to the bear market rally that began in March 2009, unless the Federal Reserve drops the QE3 bomb on us sooner than we expect.

Peter Prudden is the General Partner of SISU Advisors LP and the Managing Member of Prudden & Company LLC. Read more of his comentary, here.

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No positions in stocks mentioned.

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