Market Overview

At $100 Billion, Facebook Could Be a Bargain


A few weeks ago when Facebook filed its IPO, rumor had it that Facebook could see a valuation of over $100 billion.

Using the International Monetary Fund's numbers, that would make Facebook worth about four times the GDP of Afghanistan, and about a third of Greece's GDP.

The total was met with some noticeable skepticism, even as the social network inches closer to adding its billionth user. A headline on Forbes boldly stated that the valuation defied logic; another headline on MSNBC called it “vaporware". One of our own writers wrote an article warning investors not to buy into the hype.

The talk surrounding Facebook's valuation was centered on Mark Zuckerberg, and rightfully so. He created Facebook and has been its driving force. After Facebook goes public, he will still own a controlling stake in the company and over 50 percent of the voting stock. The company's success will ride on him.

Some view that as positive, while others are not so sure, questioning Zuckerberg's ability to handle the demands of investors and Facebook's opportunities for continued growth. There has also been some minor speculation that he is trying to cash out while the getting is good.

Of course, this is the same guy that, when refusing a $1 billion buyout offer from Yahoo! back in 2006, said to the company: “It's not about the price. [Facebook] is my baby, and I want to keep running it.”

The truth is nobody really knows what Zuckerberg will do the next few years, but it is a widely held opinion he is not so much motivated by money, but by his desire to change the world. Facebook is his engine to do that with. In a letter that accompanied Facebook's IPO filing, Zuckerberg deemed his company a “social mission“ first and foremost.

With Facebook having pulled in only about $3 billion in revenue during 2011 and struggling to monetize the mobile market, the current valuations for Facebook are a bet on Zuckerberg's long-term vision. Though there is the popular perception that Zuckerberg is socially awkward, those who know him seem more likely to call him a genius.

Dustin Moskovitz, one of Facebook's founders, said while commenting on Aaron Sorkin's movie The Social Network: “At the end of the day, they cannot help but portray him as the driven, forward-thinking genius that he is.”

Sheryl Sandberg, Facebook CFO and former Google (NASDAQ: GOOG) employee, has called Zuckerberg “a product visionary“ and the “Steve Jobs of his generation” in interviews.

Then again, you might expect people in their positions to use hyperbole.

Maybe Microsoft could be considered a more objective source. In 2007, Microsoft spent $250 million to acquire a 1.6% stake in Facebook, giving Facebook an assumed value of $15 billion. At the time, the move was considered a gamble, with the New York Times declaring that the estimate for Facebook's value was “astronomical".

Microsoft saw something in Zuckerberg's company it liked, and the $250 million it spent is a pittance for what it ultimately got out of the deal.

Some of the most coveted talents in Silicon Valley appear to be finding something they like in Facebook, too. Top Prospect, an online job referral company, found that for every 15 people that left Google for Facebook, only one left Facebook for Google.

Sandberg, for example, left a prominent position at Google in 2008 for Facebook because of the tremendous growth potential she saw in the company. She had joined Google in 2001 for almost the same reason.

That Facebook is now profitable can in many ways be chalked up to Sandberg's leadership. Before she came on board, the company was losing money, and it was largely her job to change that.

Being able to spot out and attract top talent is an important trait for a CEO, and Zuckerberg has at times displayed a knack for it. Sandberg's move to Facebook was the end result of a months-long recruiting effort by Zuckerberg that started at a Christmas party.

Hires like Sandberg have allowed Zuckerberg to keep his focus on the product, where he feels most comfortable.

As Facebook matures, two of his primary goals for Facebook are to expand it to as many platforms as possible and to “weave real events [reported to Facebook] into stories,” as he puts it, adding value for users and marketers alike.

Facebook's new Timeline feature is one of the first major steps the company has taken toward achieving that latter goal, while ambitious projects like TV integration with program guides based off of what people's friends are liking and writing about are in the planning stages.

If Zuckerberg can follow through on Facebook's full potential, the company's true worth should be greater than $100 billion. Google has a market cap of roughly $200 billion, and Facebook looks to be positioning itself as a strong competitor to Google - ever heard of Facebook Docs? Facebook wants to be a complete portal to the Internet, just like Google.

One of Facebook's greatest strengths is that it can use the vast amount of information it collects from users and its robust, open application platform to deliver extremely personalized Internet experiences. Facebook users can filter the Internet for each other.

Google, meanwhile, has traditionally relied on the abstractly derived mathematical models used by its search engine and applications developed in-house to succeed.

The search giant makes tens of billions in revenue annually and strategically reinvests most of that money back into its products, which are tightly integrated with one another. Facebook's IPO will give Zuckerberg a real war chest in his battle against Google, raising billions instantly that can be used to develop and acquire new products and services.

The debut of Google+ in 2011 and the recent release of the Google Chrome web store – a possible alternative to Facebook's application platform - had to be unnerving, and may have played a role in Facebook going public.

Google+ and Chrome both benefit greatly from tight integration with Google's other products, like its search engine. Google is already using Google+ and the data it mines from it to personalize its search results for users, in what could be a preemptive move against Facebook.

Facebook's biggest advantage when it comes to personalizing the Internet is that it has a significantly larger, more engaged user base than Google+ and more experience running a large social network. It will need to capitalize on that immediately if it is going to fend off Google's social network, which now has over 90 million users.

The recent valuations of Facebook show that there must be some very influential investors who feel that Zuckerberg is up to the task.

Remember, there once was a time back in 2006 when researchers at places like Citigroup and Standard & Poor's were downgrading Apple (NASDAQ: APPL) despite the wild success of the iPod - the brainchild of Silicon Valley's most famous visionary, Jobs. Back then, the stock was usually trading closer to $50 than $100.

Sometimes, number-crunchers can get stuck on the latest revenue numbers and overlook the importance of vision. It is intangible yet vital component of a company No analyst in 2006 anticipated the iPad.

Sure, Facebook could go the way of Myspace, but how many articles hailed Myspace's creators as visionary geniuses? This is an entirely different situation.

Speculating on Facebook for near-term gains could be very risky, given the major players expected to be involved in trading the company's stock early on. Long-term, though, the company could shape up to be a steal in the $85-150 price range.

It all depends on how keen Zuckerberg's vision really is.

Posted-In: Long Ideas News Topics IPOs Markets Trading Ideas Reviews General Best of Benzinga


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