Facebook a Valuation Nightmare
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you haven't been stranded on an island talking to a volleyball named Mr. Wilson, you should know that Facebook, the social media giant, is entering the public market. Officially, the road show started May 7th with the IPO set for May 14th and an interesting IPO it should be. The most interesting news to me coming out of the press is the valuation estimates ranging from 50-100 Billion dollars. It seems more recently though that the estimates are more in the range of 90 to 100 billion. Is it just me or is that a big difference? Since when is 50 billion an appropriate range and even 10 billion is a big chunk of money? It would make more sense if these analysts and experts were just honest with us and said I have absolutely no clue. Listening to a Tom Gardner pod cast, I was struck by a very astute point he made in that buying Facebook as an IPO at a price valuing it at 100 Billion would mean that it would have to rise to 200 Billion for you to make it a one bagger. That's an awful lot of advertising and social gaming to sell to achieve those numbers.
The next issue with the Facebook IPO is its comparison to other tech stocks that have gone through an initial public offering. Comparing Facebook to Google (NASDAQ: GOOG) when it went public makes no sense and is paramount to comparing Apples and Aliens from Mars. Truthfully, there hasn't been a company in the history of the stock market that has come to market with so many engaged customers. The main problem is no one knows how to fully value each customer that Facebook has. Google has detailed analytics when it comes to its online and mobile advertising so you can see how it makes money and how it grows its revenues. Facebook on the other hand doesn't provide the same kind of metrics and is much more guarded about their information. Who knows what could hit the market that would change their business model completely. Bring me the person that predicted when Facebook was starting out that a social gaming company that sold virtual stuff for real world dollars would be raking in hundreds of millions of dollars in revenues every quarter. Zygna (NASDAQ: ZNGA) in a few years has gone from an unknown company to a business valued in the billions that recently bought a smaller social gaming company Omgpop for $180 million. This demonstrates that not only was Facebook a game changer in the realm of connecting people, but its economic potential hasn’t even been scratched.
We don’t know the potential cash generating business that Facebook can enter to monetize its over 800 million active users. We know they will be generating revenues from mobile advertising and social gaming but apart from that, the business can only become more and more lucrative as it has just under 15% of the world’s population interacting with its platform. Some say Facebook being valued at $100 billion is an indication of the next tech bubble. Others could argue that it’s a bargain price for the most influential company in our time. There is a combination of excitement and dread for the IPO as some say that Facebook will be minting money and others who dread another tech bubble bursting.
There isn’t an easy way to value Facebook and as with any stock that has been as anticipated as Facebook has been, their will be in my opinion a lot of volatility in the short term. They will flee and flock to the company based on news reports and the first earnings report will be key in deciding if it will be a short-term winner. Looking down the road its hard to imagine Facebook not becoming successful as they have a growing user base, the technology keeps improving allowing more and more options to monetize services, and the company has been relatively well managed up to this point. I see Facebook in the long term being a successful pick, while in the short term it’s anyone’s guess.
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