Does Facebook's Story Back Up Its Hefty Valuation?

Details of Facebook's IPO have been leaking to investors this week, increasing the hype for the social networking titan. It has recently reached a $100 billion valuation, prompting some investors to question if the company is capable of producing results.

To learn more about Facebook's potential, Benzinga reached out to Michael Pachter of Wedbush Securities.

Pachter is currently neutral on Facebook, stating that the lack of details, since it's private, makes a definitive buy or sell prediction difficult. According to Pachter, "Facebook has a lot of potential to monetize its huge user-base. Facebook could pursue data-mining strategies without offending its users. Instead of selling user information to other companies, Facebook could simply make targeted advertisements more efficient and compelling for users."

Pachter also mentioned that Facebook could try to interconnect people on Facebook. For example, "I would like to know if close friends are listening to new music or watching new TV shows. Data mining could drastically increase exposure for corporate clients in a very efficient manner."

Facebook has come across many hurdles regarding its stance on privacy issues. Since Facebook will have to be completely transparent by the time it debuts on public markets, it may have to discontinue current practices to appease investors. There are certain methods of data aggregation that Facebook has used that has angered users in the past. Facebook has also sold private information to clients without users' consent.

Assuming Facebook still takes part in these practices, conventional wisdom states that it will have to discontinue them by 2012. Pachter does not think it will affect profitability, however, since there are many avenues that Facebook could pursue without invasively accessing users' information. "There is a $500 billion market in global media and advertising, and even more money in product sales. We could be seeing a space operating with over $1 trillion dollars, and Facebook is in a prime position to capitalize on these opportunities."

As some users are aware, there are many fake accounts present on Facebook, for both personal and professional reasons. While some may contend that an increasing amount of fake accounts could overstate the impact that Facebook has on the public, it may not actually relevant. Pachter states that "current revenues already surpass $1 billion for Facebook, including both real and fake profiles. It seems unlikely that the Facebook IPO would spur the rate at which fake profiles are created. Considering that, fake profiles in the future will probably not affect future revenue growth."

Lastly, some traders are concerned about another technology bubble, this time, in social networking stocks. Looking at companies like LinkedIn LNKD, Groupon GRPN, and Pandora P, some investors are worried if Facebook will plunge as soon as it IPOs. Pachter had no comment on the prospect of another market bubble, but he stated that Facebook is different from companies like Groupon. "Groupon's niche has a low barrier to entry, and its business model does not have a sustainable advantage. Many other competitors have already been popping up and stealing market share, but the same cannot be said of Facebook. While there are other social networking sites, none have the same reach that Facebook has, and simply does not offer the same user experience."

Since many of its business practices are currently shrouded in secrecy, Pachter cannot predict if Facebook is worthy of a buy or sell recommendation. However, he will be looking for "management's comprehensive description the markets that it can capitalize on, its competitive position in those markets, and its plan on monetizing its user-base."

Facebook is an incredibly popular social networking website, set to IPO in the first half of 2012. Investors are wary of its $100 billion valuation, however, and are trying to figure out how the company can grow its businesses. Michael Pachter of Wedbush Security mentioned that Facebook has plenty of potential, but a buy or sell recommendation is dependent on its public financial statements.