I think it's fair to say that despite rational logic, the facebook IPO will be a wild success. They will get their $100B valuation, and the VCs, PEs, Angels, IBanks, early facebook employees, and a muralist will make a mint. BUT, this company's stock price given the current application features, will eventually significantly stagnate. It won't be right now, it won't be 3 years from now, but mark my words this version of facebook will be in the $100B valuation range in 5 years give or take 5%. There is no bubble, its not a ponzi-scheme either, but what it is is an opportunistic event to get people paid while the "potential" and brand is hot. This is a classic case of strike while the iron is hot, plain and simple.
So what is the key driver in facebook's valuation? The valuation is being buoyed by the strength of the brand (probably supported in part by the "finger-in-the-air" guesswork of value-per-user), much more than the strength of the business model (typically supported by some variation of discounted cash flow). The key players are VCs and IBanks who have invested significant capital to keep facebook cash rich to compete with Google, acquire talent and technology, and market the company globally. Now they need their return plain and simple, and that return will come purely from brand appreciation, not profits. This IPO is the equivalent of the tax man, but for only for those 1%ers that want to improve the ROI for their facebook led investment funds or return some capital to limited partners to impress for their next fund raise. Not to mention creating much needed liquidity for employees. And why do they need liquidity for employees? Because facebook continues to have a cash problem despite their healthy piggybank. That's why they are raising $5B in the IPO. You can't wage a war on talent, without paying premiums (rumored that recent facebook employees only make $80,000 annual cash compensation on average, but fair employee stock of about 40,000 shares) ... and you can only acquire so many companies with stock before employees start asking for the full benefits of an IPO versus secondary markets. Also to support a $100B dollar valuation you have to continually defend your market and in turn your brand which can be a very expensive war to wage. And in this case, brand is the foundation.
But, we all should know that brand is a wicked intangible. The tech bust of the turn of the millennium was due to inflated valuations...based purely on brand and expected future profits. The failure was that wall street and every Tom, Dick, and Harry placed bets on whether these internet brands would develop and be adopted leading to massive speculation (stamps.com we are looking at you [1999 vs 2011]). The valuations saddled the companies with expectations that were impossible to meet over the long term, eventually to firing executive teams, key employees leaving for greener pastures, and brands falling apart all after initially cashing out investors. Proving that brand is a hard foundation to build a house. However, there are always big winners when things go right. Amazon is one of those winners, so was Google. But neither company was laden with $100B dollar pressure either.
However, facebook is a little different, and that is why this will be a hugely successful IPO. With facebook you know exactly what you are getting, an established brand with significant value weaving itself into the fabric of all media and commerce. But, the value today is supported solely by brand, and the future value is supported by hopes and dreams that facebook will eventually become one of the few winners in new media. This means the need to transfer a significant amount of wealth from traditional media (the Disneys, NBCs, and Activisions of the world) to facebook and its family of competitors because the ad and consumer media pie is only so big.
The fact is that social media is quickly converging all forms of digital interaction; and media is the head pin. So facebook's immediate future growth will be as a digital media company, not necessarily as a technology company. facebook monetizes amateur and crowd media better than most competitors and the faster they can help amateur's make better content and applications, the more money facebook will print.
As such, they should be evaluated less with the Microsofts, Googles, and Apples of the world and more associated with the Disneys; especially if you are going to value you them at a largely mature market cap of $100B. So, if you take Disney's current market cap of $72.7B on Revenue of $40.9B, EBITDA of $9.7B, and OCF of $7B - which results in a forward P/E ratio of 12x, 2x revenue, and about 8x EBITDA. This is for a massive BRAND, whose media properties touch 120 MILLION PAYING VISITORS a year just on theme parks alone, and penetrates probably way more than the 850MM users facebook claims. And they generate profits from PAYING CUSTOMERS in multiple businesses beyond just an ad model or facebook credits. Now you look at facebook, which is at $3.7B in revenues growing at about 70-100% annually (depending on ad growth and acquisitions) with expected OCF of $1.5B with a seemingly correlated CAGR to revenue. So an established time-honored mega-brand is worth $27B less than facebook who makes 1/10th the revenue and generates 1/7th the operating cash flow. So unless facebook plans to sell trillions of digital hotdogs or create facebook the amusement park, I just don't see the immediate value today. Talk about things that make you go hmmm.
In fact, if we assessed facebook from a revenue perspective, it would have to grow at a GIGANTIC 82% CAGR over the next 4 years to even equal the revenues of Disney TODAY... again with Disney valued $27B less... However, operating cash flow would only have to grow at a 63% CAGR over 4 years... but, still a Herculean effort for even the most innovative technology companies.
So what does this all mean in the end. It means that despite anyone's claims that this IPO and its valuation isn't about the money, it has everything to do with money. It is a very blatant play to book returns for employees and investors through a significantly forward looking valuation. It's obvious that facebook at 100x earnings and 25x revenues is a ridiculous bet, but it will be successful. It will be successful because 1) people LOVE brands and 2) dumb money chases smart. But never fear, as long as you plan to be in facebook for at least 4-5 years, your $100B investment should stand pat! And if facebook beats guidance and actually grows at that 82%, 63% or even greater than a 20% clip, the valuation will hold. But one slip up, and that brand foundation could crumble the entire castle. And if facebook crumbles, I'd hate to see the fallout for the other technology stocks. So I say long live facebook...because your investment come IPO will probably have to be just as long as their life.
K
