Nancy Miller Takes a Long Look at Facebook's IPO
Nancy Miller's new book, The Facebook IPO Primer, examines the company from a financial standpoint and offers valuable information to anyone considering investing in the social media giant. Miller spoke to Benzinga about her aims and objectives with the book, offering a few valuable insights into Facebook along the way.
Could you give us a little background on you to kick things off> I'm a financial reporter. For the past couple of years, I've been freelancing and blogging. I've contributed to Barron's Magazine, I've freelanced at True/Slant, and a lot of other places. I took some time off to be a mom, and before that I ran the newsroom, I was managing editor, at Quick Nikkei News, which was a real-time news project from Nikkei, the Japanese publisher. Quick was their first American newsroom, and I was actually the highest ranking woman in the organization. Before that, I was a real estate market reporter at USA Today. I was a reporter on the mortgage beat at Knight Ridder Financial News, before anyone cared about mortgage securities. Suddenly it became very interesting. Most people used to think I was very boring.
So what led you to write this book?
Actually, Mitchell Brown over at eWallstreeter.com, a news curator, called me and asked me if I'd like to write the book. That was really the genesis. But the reason I decided to do it is that I thought it was a great idea because Facebook is a company that everybody knows and they think they understand. I think as a result, many people would ask themselves, 'gosh, shouldn't I invest in this?' After all, Peter Lynch always said 'buy what you know'. What could anybody possibly know better than Facebook? So I thought this was a great opportunity to write about a company that everybody knows but to use it as service journalism, to explain how the stock market works, and in particular the market for hot new stocks. Most people don't really understand how that works. For example, they probably don't realize that they cannot get Facebook at the initial price, the IPO price. They don't understand how it is everyone else, not the initial investor, who makes a lot of money on a first day pop, which is very likely to happen on Facebook shares. So the book explains all that, but it also teaches people how professionals look at Facebook. Why is it that some people say the standard valuation for the company is $100 billion. A lot of people don't even understand what the term 'valuation' means. I go through five different scenarios of how people evaluate the company, and come up with five different numbers, some close, there's a low ball one and a very high one. But the point is that its people who have training in trading and finance who come up with their own different answers to 'what is Facebook worth?' It's just so that they understand that nobody really knows and that it's just an educated guess or estimate.
Who is it aimed at?
The people I'm talking about are kind of newbies. Investors who aren't experienced in IPOs. I think this book is also very useful for professional investors because I really do go through the Facebook game plan, the culture, the risk and so forth. It's useful for anyone, but it's written in a way that anybody can understand it and understand how the trading of the stock works.
How did you set about starting it?
That's an interesting question. As a private company, it wasn't terribly open except that there are a zillion reporters covering it so there's a great deal of information. The critical data on its finances were pretty closed. There were a great number of estimates, or guesstimates. The most important thing that happened when Facebook decided to sell stock is that it had to file a F1 registration with the SEC. In that registration, it goes into great detail about revenues, profit margins, how it breaks down advertising vs. Facebook credits. The information was suddenly available. That's also what's interesting - everybody was looking at the same set of numbers and coming up with different ways of saying that this is what the company is worth.
Did you try to get hold of Facebook?
They're really in a quiet period, so I really based it on publically available information, which is quite plentiful. But it's not the kind of thing they were going to comment on during the quiet period, about their finances and their outlook. That's a fruitless enterprise.
What are the biggest misconceptions about Facebook?
That's an interesting question because there's so much written about it. I don't know if it's a misconception, but I think people were surprised at how good the profit margins were. It's about the same as what Google was when it went public back in 2004, which is close to 50%. I think that was a pleasant surprise. I think there was surprise, in the non-advertising area, which is a significant 15%, revenues from Zynga account for 12%. I think that raised a red flag, that one company could have a big share of revenues. I think there was concern that Zynga could try to become independent of Facebook because, when users pay for games and other things through Facebook credits, Facebook keeps 30% of the payout, which is quite hefty. Google, by the way, has started a competitive credit system on its social media system. They're only charging like 3% - it's a fraction. Of course, Google Plus doesn't have the same traction as Facebook, but it's something to keep an eye on. I think everybody was very pleasantly surprised to see that Mark Zuckerberg had written a letter in the F1. The only other letter that I could think of was Google when it went public. It's interesting because they both articulated their vision and culture for each of their companies. If I could pick something out of Zuckerberg's, it would be 'move fast'.
What should investors be wary of with Facebook?
I think there is a couple. One is something I think of as 'Facebook exhaustion'. Facebook right now feels like it is indomitable. It does have an amazing lead in the social media market place. But I think a lot of users just use it because it's there, they don't love it. I think many people feel wary of its ever-changing privacy policies. I think they feel wary about how their data is used for advertising. That's an interesting conundrum for users because if that data is used well, then you see ads that mean something to you and are useful. On the other hand, some people are creeped out. For example, and this is relating to Google News and Gmail, I was planning a party and all of a sudden, I started receiving emails to Gmail about parties. Hmm, that's a little too close to home but it could be useful. That's a cultural question, almost. But I think the privacy issue is huge. I think the other issue is that Mark Zuckerbeg controls 57% of the company and, really, if you are buying Facebook, you are buying Mark Zuckerberg's vision and his management skills. If you have total faith in him, if you don't mind that he buys Instagram for a billion dollars without consulting anybody or without even having somebody else in the room, that's fine. You could say, 'good for him, he built the company in eight years, let him do what he wants and I'm happy to go along for the ride'. There is a big risk in that as well. What if you don't like him? What if he gets sick? But I think the other risk is that social media in general, as a category, is very new. It's so seeped into our lives, it's hard to take a step back and realize that right now, we're in the middle of a revolution in the way we connect to one another and the way we interact. I went to Amazon and bought some lotion, and it says 'do you want to share this with your Facebook friends?' As a matter of fact, I do not. So who will know where we are in this revolution of how we connect, share the details of our lives. Think back to Myspace which, until 2009, was bigger than Facebook. That was the social media hottie. It had all kinds of problems that were unique to its story, but back in 2005, News Corp purchased it for about $580 million, and then sold it a few years later for $35 million. At the time, everybody wrote these stories about how it was a great idea, and how it's going to fit into News Corp's media strategy. It seemed brilliant. It's not that I'm dissing News Corp at all. What I'm really saying is the change in the market place is rapid. Facebook is probably different just by virtue of how extensive it is even compared to Myspace, and its building incredible infrastructure which means the barriers to entry are really getting a little higher so that it's more difficult, but not impossible, to unseat Facebook now than it was to unseat Myspace five or six years ago. What's amazing to see is how the crowds shift from one side of the boat to another and tilt things. So I think the risk is that we're in the middle of something huge, and so whatever it is that you're putting your money down on, there's that risk of betting on something that's in a state of being built and being formed.
After all of your work and research, would you invest?
I was waiting for someone to ask me that. It's an interesting question, but in a way it doesn't matter. The real point is, what is the individual's risk profile. At the moment, I would not invest. But I have to pay tuition bills. I have certain things going on in my life where I'm not putting money in very risky things. Would I invest if I had different priorities? Very possibly, but I will say this - I would not invest on the first day for sure, no matter what my personal risk profile is. I'm not sure exactly when I would. I would definitely let it season. I would not be in a hurry. If the Facebook story is anything like the Google story, you wait six months or even a year. You won't catch the early, relatively low price rates, but I've had time to watch the company season and know that I can have confidence in the people and so forth. Some people say Facebook's a little different because it's been seasoning more in the private markets. My instincts, and I'm a relatively conservative person, is to watch a little.
The Facebook IPO Primer can be purchased here.
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