Started: Monday, October 17th, 2011

Facebook

A look at various aspects of Facebook to determine if their stock is a buy,

hold, or sell.

Facebook will, undoubtedly, be the biggest thing to hit the stock market since Google. Therefore, it is worth investing in before it releases its IPO. You could still make money at the IPO, as people did with Google. However, it’s best to begin your race before anyone else has a chance to start.

Some are afraid that there is another bubble in the works:1) “social networking is a fad” 2) “Facebook is overvalued” 3) “there’s no way Facebook can be as valuable as Boeing” 4) “too good to be true” 5) “Facebook isn’t the next Google”

1) “social networking is a fad”• Response:

– Really? When will people not find the need to connect with family and friends? When will you not want to find out about the other parties that went on last night? When will employers not want to creep on employees? When will people not want to share photos & videos?

– Not in the foreseeable future.

Note: it is impossible to refute this claim with any solid evidence. By the same token, it is impossible to back up this claim with solid evidence.

2) “Facebook is overvalued”

• Maybe

3) “there’s no way Facebook can be as valuable as Boeing”

• Sure there is. People can think it’s more valuable.

4) “too good to be true” 5) “Facebook isn’t the next Google”

• Facebook isn’t the next Google. It’s better.

• Most people would have said, in 2004, that there would never be a site that would have 800,000,000 users. A mere 7 years later, it has become reality.

• Facebook is just as valuable as Google because the average user utilizes both each day.

Five reasons why one man isn’t not buying Facebook

(guess what? One of them is that he doesn’t have the mula. Go figure.)

Reason #1: Someone who knows a lot more than I do is selling. While the identities of the specific sellers remain unknown, the current consensus seems to be that most will be from venture capital investors like Accel Partners, Peter Thiel, and Greylock Partners. Maybe Mark Zuckerberg will kick in $50 million or so himself, just for some fooling around money.But it's not a dilutive primary offering from the company. "Facebook needs no cash!" say its cheerleaders. Okay, fine. Let's just say for argument's sake that it is early stage investors who are selling. Why would they sell? Because they're in need of cash to invest somewhere else? The way the social network is talked about these days, it's the best investment opportunity in town. So why would anyone want to forsake it? And don't give me that crap about VCs being "early stage" and wanting to cash out of a "mature" investment. These people are as money hungry as any other institutional investor, and would let it ride unless….they saw something that suggested that the era of stupendous growth was over.Facebook reached 500 million users in July. There's been no update since, even though the company had meticulously documented every new 50 million users to that point. Might the curve have crested? And let's not even talk about the fact that they don't really make much money per user — a few dollars a year at most. (Its estimated $2 billion in 2010 revenues would amount to $4 per user at that base.) I certainly haven't spent any money on the site, despite being a fairly regular visitor. And any advertiser who is trying to target me on the social network is wasting their money. But that's just me.

Response: I think the shareholders that are selling are just too antsy to wait for the IPO.

As for Facebook’s user growth….800,000,000 is a great number. That’s almost 1/8 of the whole population of the world, and almost ½ of the Internet using community.

Reason #2: Goldman Sachs. I've got nothing against Goldman Sachs. Hell, I worked there. But when Reuters' Felix Salmon says that the Goldman investment "ratifies" a $50 billion valuation, he's only half right. That is, someone, somewhere—perhaps the Russians at DST Global—might just believe this imaginary number. (It's hard to see why, though: DST got in at a $10 billion valuation in May 2009. Facebook's user base has more than doubled since then. So its valuation should…quintuple?) But concluding that Goldman Sachs believes in a $50 billion valuation is poor reasoning. As Salmon does point out, Goldman has likely earned the lead book runner slot in any initial public offering.Consider a 20% sale of the company in such an event – or $10 billion at today's "valuation" – and a 2% underwriting fee of $200 million. Goldman would have to share such spoils, so let's call it $100 million into their pocket. Subtracting that underwriting fee from the Goldman investment, and you could easily make the case that for a net purchase price of $350 million, Goldman's ante only values Facebook at $39 billion. Hey, that's just off by $11 billion, so don't worry about it. Buy your shares where you can get them. In other words, go open a $10 million minimum private client account at Goldman Sachs. (Who says Goldman didn't learn its lesson about shafting its own customers? This time around, they've managed to get the customers to line up the shaft themselves.)

Response:……Goldman is positioning itself to be the primary underwriter of Facebook’s IPO. Plain and simple. They’re finally trying to get something right.

Reason #3: Zynga. For all the success of the largely-Facebook-hosted games of Farmville and Cityville, it's hard not to wonder what the success of the anachronistic game maker Zynga really means. Do people really miss their Atari that much? I doubt there's any crossover between the people playing Farmville and those playing the technologically advanced Call of Duty: Black Ops. Which is fine – to each his own. But all the Zynga games make me think about is Wal-Mart (WMT). Which is also fine – there's nothing wrong with being compared to one of the world's most successful companies. But here's the disconnect: if Facebook's future success depends on aiming for the lowest common denominator with the most people possible, that implies pretty slim margins a la Wal-Mart. You think they're going to justify a $50 billion market capitalization through banner ads? Are you kidding me?

Response: Fuck Zynga. Facebook is worth what it’s worth. I would be willing to pay up to $800,000,000,000 for Facebook. There, I said it.

Reason #4: The niggling details. Important question: Just what are Facebook's numbers? Important answer: Who the hell knows? In November, Zuckerberg told the world not to hold its breath for an IPO. No worries, Mark, because I'm not. Google (GOOG), if you recall, was pretty open by the end of its life as a private company – everybody knew what it was doing and how it was doing it. Facebook (and, in the same sense, Twitter) reminds me of Kozmo.com during the dot-com boom. Kozmo, you will recall, somehow had people convinced that they were going to make tons of money doing something remarkably pedestrian – that is, delivering Ben & Jerry's by bicycle to Manhattanites. (I remember sitting in the offices of Flatiron Partners way back when. Someone ordered some ice cream on the Web, and – voila! – half an hour later some delivery guy shows up. Kind of like what would happen if you called the deli on the phone. The future was ours to see!) Facebook reportedly pulled in $2 billion in revenues in 2010. I don't know about you, but I'm disinclined to pay 25 times revenues for anything, let alone a company the finances of which I know pretty much nothing about.

Response: Yes, Facebook enjoys its privacy. Is there a problem with that? It simply shows that they are a company that doesn’t have to give a shit what investors think. Making them more valuable.

Reason #5: Warren Buffett. The legendary investor cautions those looking at outsize valuations to consider one's purchase of company stock in a different way than price of an individual share, whatever it may be. He suggests one look at the total market valuation – in this case, a sketchy $50 billion – and to consider: Would you buy the whole company for that price, if you had the money? The market value of Goldman Sachs is just $88 billion. I'd take more than half that company over the whole of Facebook any day of the week. I bet Warren Buffett would too.

Response: As stated before, I would be willing to pay $800,000,000,000 for Facebook.

• Think about it:– Myspace started 2003, Facebook started 2004.

One failed, the other thrived.– Google started 1998. They went public in 2004.

They are still going strong.– Facebook, if its IPO is late 2012, will be one year

later than Google’s timeline. If anything, its not rushed.

Number of users of various social networking services

As we can see by Exhibit A, 800,000,000 people worldwide utilize Facebook. This is roughly 1/8 of the entire planet. Facebook has staying power. It would take almost the intervention of God to change Facebook being number one. By the very fact that they have so many users, they make it hard for serious competitors like Google+ to compete because everyone’s friends are on Facebook. And Google is good at doing searches. They think that just because they have brand name power that they can play the social networking game. There is a reason Facebook is number one. They do one thing, and they get it right.

STOP! Look around you. How many peoplethat you can see do you think have Facebook?

Facebook Projected Revenues

We see that in 2010, Facebook’s revenue was $2.0B. It is estimated that by 2015, it will have grown to $12B. This represents a Compound Annual Growth Rate (CAGR) of 43% over the 5-year period.

Unique visitors, in millions

Source of traffic to Glam Media

Source of traffic to Amazon.com

ARPU (Average Revenue Per User) across various internet companies

Lots of room to grow!

Facebook’s Revenues

The Bottom LineIt is debatable whether Facebook is a buy. But I would say it is a buy based solely on its intrinsic value. Who won’t want a piece of the most populous social networking site?

I cannot invest in Facebook, pre-IPO. I am not an accredited investor: not worth $1,000,000 and don’t make $200,000 a year.

However, Austin College’s Student Managed Investment Fund is worth $1,000,000. It might require some fancy money sorting, to get approved, but I think it would be well worth it.

I would suggest an investment of $25,000. Assuming $35 per share, this would get the Investment Fund 714 shares.

I would suggest holding onto it until it is worth $100,000. This assumes that shares will eventually be worth $140. Google is roughly $550.