Wednesday, May 9, 2012

My Two Cents on Facebook

It has been a long time since an IPO has been as eagerly anticipated as the Facebook offering that is scheduled to be priced next week.

Facebook management was in town yesterday to pitch the deal. Here's how the Boston Globe reported it this morning:

The excitement surrounding Facebook Inc.’s forthcoming Wall Street debut arrived in Boston Tuesday as the company’s top executives pitched the massive social media company to hundreds of potential investors, and Mark Zuckerberg, its 27-year-old celebrity chief executive officer, met privately with some of the city’s premier money managers.
It was the second stop in a nationwide “roadshow’’ ahead of the social network’s initial public offering, when it will sell shares on public markets for the first time. The company could begin trading as early as May 18, and is expected to raise up to $11 billion in the biggest-ever stock launch for a technology company. Last week, it set a $28-to-$35 price range for its shares.

Facebook has also prepared a 30 minute video for potential investors:

In my experience, it is difficult for investors to make money in an IPO.  By definition, companies sell shares to the public at the highest possible price, and at a time that is most advantageous to itself, and not to the investor.

I remember when Apple came public in 1980.  The hype was similar to Facebook, and for a while Apple's stock soared.

But then reality set in. Steve Jobs was fired, and Apple nearly went out of business.  Apple of course has since rebounded in a spectacular fashion, but it took many years.

I suspect that Facebook shares will enjoy a strong start when they are priced next week, but then the real work begins:  justifying its lofty valuation.  This will take time, and I also expect that Facebook investors will experience some pretty volatile times.

We have seen numerous IPO's of internet properties over the past year - Groupon, Zynga, Pandora Media and LinkedIn - and all wound up trading below the IPO price within months of the offering (although LinkedIn has since rebounded).

I am not as skeptical as some about the valuation of Facebook.  True, the projected offering price is 99x last year's earnings, and 50x revenues, but Facebook's potential growth could be phenomenal.

I am probably not buy Facebook shares for clients at the initial offering, but I am also going to keep a very close eye on the company.  If they can figure out a way to direct advertising to their 900 million users, it may very well be that we'll look back 5 years from now and wonder why we weren't buyers.

Although I did not attend yesterday's event, my colleague Rich Sipley did, and here's a small excerpt from an email that he wrote to all of us when he returned (thanks Rich!):

-        Mark Zuckerberg and his black hooded sweatshirt did not make it.  COO Sheryl Sandberg and CFO David Ebersman led the discussion.  Both were well dressed.
-        Investors were asked to be at the hotel at 7:15.  

    A few got there as early as 6:30 (not me!).  Rather than casually filing into the meeting room, we were kept in the lobby as a security detail kept people from going up the stairs.  Around 7:30, they started letting people go through 25 at a time.  I’m guessing there were 250 people or so.  The meeting didn’t really get started until 8:05.

-        Ebersman made a few initial comments, mostly revolving around the concept of the company – the words “social”, “connected” and “experience” were seemingly in each sentence in one form or another.  They then threw it open to Q&A.
-        The questions were fairly powder-puff and revolved mostly around ads on Facebook and how they provide a different experience to marketers in the way they can target their message.  

    The sense is that they will introduce more ads and charge more for each ad going forward.  Sandberg stressed points that from a marketing client perspective, ad dollars spent on Facebook have the highest ROIC and that marketers need to rethink how they market on Facebook (they will get more bang if they target their ads rather than take their print message, which isn’t all that targeted, and just port it to Facebook).  She told stories of Ford’s introduction of the new Mustang and Pepsi’s involvement in the Indian Cricket championship as success stories.