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Facebook IPO Thoughts and Predictions

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I figure that if every other personal finance blogger is going to write about Facebook today and tomorrow, I might as well. Unlike most of them, I live in Silicon Valley. Also, in 2006 when I was moving here from Boston, they flew me out to be a lead engineer on their mobile engineering team. It occurs to me now that they might have read too much into the Blackberry bullet point on my resume.

Sometimes I look back and wonder what might have been if I had answered some interview questions differently. At the same time, some of the engineers I talked to had said that they put in 12-13 hours of work a day. This is one of the reasons that I never dwell on Facebook. It wasn't a place that I was going to be successful at. I put in those hours at start-ups before, but I had reached a point where I needed to focus on balancing time with friends and family.

So the big news is that tomorrow Facebook is going to go public. What this means is that those employees will be able to start exercising their stock options and getting real cash to spend. It seems like that is grabbing some nationwide headlines. However, it's magnified a thousand times in the local media.

It's got me thinking, "With all the Facebook money in the local area, how can I capitalize on it?" I know a local real estate agent who is expecting a bit of a windfall as a flood of new millionaires look for housing. Try as I might, I haven't been able to come up with a way to get my hands on any of that money. (If you have any tips, leave a comment.)

The question that everyone seems to be asking is whether they should buy into the Facebook IPO. It is looking to be priced at around $38 and I expect that it might close tomorrow somewhere in the $42-46 range based on the excitement. That would make Facebook worth around $120 billion dollars. That's certainly a lot of money, but it is not an unreasonable valuation of Facebook in my opinion. I think once the excitement dies down it could fall back to close to $30 a share. At that point, I would probably consider grabbing some. I'm a strong believer that attention is one of the most valuable commodities in today's world, and Facebook seems to be the leader with many people spending hours of their time there.

That's how I intend to play the Facebook IPO. What about you?

Well, we know that Facebook isn't going to be worth 36 trillion dollars?

Last updated on May 31, 2012.

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16 Responses to “Facebook IPO Thoughts and Predictions”

  1. tom says:

    I really don’t get how FB is worth more than McDonalds, Amazon and Citi. Do companies actually see value in buying ad space on FB?

    GM found that FB ads do nothing for their business. In fact a recent survey showed that very few people actually click on FB ads, let alone pay attention to them.

    In absence of a comprehensive advertising strategy, I don’t see how this company is worth so much. The P/E ratio of the company is going to be HUGE. I’m no stock expert, but I can’t imagine it sustaining even a $30 price.

    I will stand corrected if in 6 months it goes above $40.

    • Lazy Man says:

      Tom,

      I can see Facebook being worth more than Amazon and Citi. The latter especially true with the banking collapse in 2008.

      While GM did find value in the ads, there are some out there that say that GM didn’t spend their money well. I’m not sure if they did or they didn’t. Even if the current version of Facebook ads aren’t bringing value to advertisers, over time I believe they will. If you have the attention of that many people for that long of time, you are going to be able to monetize it in some way. It’s not likely people are going to leave either. It is too difficult for them as they can’t bring their friends.

      I’m reminded of Ebay when I think of Facebook. They also had an incredible P/E as they were starting out. However, since they own the online auction space, their buyers and sellers aren’t going anywhere. Sure they collect real money from each transaction, but Facebook will improve performance of its ads too.

      It may sound odd to suggest that Facebook has growth in it, but I think they can do a lot more to monetize the attention they have.

  2. tom says:

    Don’t get me wrong. I think it could be worth that in a few years after they develop a comprehensive ad strategy, but right now… $100B seems extremely high.

  3. Steve says:

    I just don’t see where the monetization happens. I search for something on google like “new shoes” and of course I might click on an ad for new shoes. On FB I’m not looking for products, I’m looking for random updates on my friends. I would never click through. It’s hard for me to see where they will make money except through selling info on what I’m paying attention to, and if they do that enough people will leave and migrate to other social networks: Pinterest, Twitter, whatever. Anyway, flawed IPO and we’ll see where FB is in 5 years. Hope it stays strong, because I like it, but I hate their business model.

    • Lazy Man says:

      When I’m driving on the highway, I’m not looking for product information, but there are billboards that people pay money for. When I listen to radio in my car, I’m looking for either music or sports radio not commercials. I’ve never clicked through a billboard or radio ad either. I wouldn’t know how ;-).

      Maybe monetization doesn’t happen with current ad format. You know how to read a financial report far better than I ever will, but it looks like they are making a nice profit for something that doesn’t monetize.

  4. There’s definitely some value in gaining “mindshare”. You might not click on a Lexus ad when you see one on Facebook, but your subconscious likely registers the presence. The next time you’re in the market for a luxury car, you might not necessarily go straight to the Lexus dealer, but they might make your “short list” of brands to consider.

  5. Steve says:

    Well, the value of mindshare is certainly there, but there’s a difference between a TV ad – which takes over the whole screen – and an internet ad, which is probably not gaining “eyeballs.” But the counter argument is certainly valid, which is that they are subconsciously gaining a tiny bit of my attention.

    And they are making a nice profit, but they will get a lot more pressure to make much more now that they are public and have institutional investors. We’ll see – one thing that’s clear in the social media space is that people can move on REALLY quickly, so FB has its work cut out for it.

    There was a long and interesting debate on this subject on TWiT this week.

    • Lazy Man says:

      Good point on the ads. I guess TV and radio are disrupting ads as you can’t just ignore them (though DVRing through commercials does something similar). Billboards can be ignored, but typically they aren’t, because they are more interesting than the repetitive road.

      From what I’ve read, Facebook hasn’t really tried to make much money yet. They are focused on the user and that experience. So getting pressure to make more money isn’t exactly a bad thing and it might not prove to be too difficult.

      While the social media space does move quickly, the power of a critical mass of a network is huge. People tend not to leave because their friends are there. I can go to a new social network, but unless it is much, much better and everyone agrees there wouldn’t be people on the network to talk to. It is a little like everyone moving to another auction. Since Ebay has all the buyers and sellers, who is going to leave for the new site. There are free and/or cheaper alternatives, but no one uses them.

      I did look for Facebook alternatives and Diaspora and Altly are two notable ones that no one uses.

  6. I wonder what the cost per impression is with Facebook ads vs. TV. They may be less intrusive (i.e. not as good for the advertiser) but if they are subtantially cheaper, could still be a better buy.

    I agree with Lazy that the critical mass factor is huge. I’m on Google Plus, but very few of my friends are. The more tech savvy ones are, but that doesn’t encompass very many of my family and friends. If I want to keep up on what’s going on with those people, I’m stuck on Facebook. And this isn’t the normal situation where the early adopters can drive people to the alternative. If there are enough laggards who refuse to leave Facebook, they’ll serve as an anchor for many more.

    Have said all this, I do think people should exercise caution with the stock. I worry that people want to buy the stock because of the “cool” factor, which is a horrible (but not uncommon) reason to buy a stock.

    • Lazy Man says:

      It seems like any cool factor with Facebook hasn’t helped the stock much. My question is, at what price does it start to become attractive?

      In this article, I suggested that it might drop back to $30 a share with the excitement gone. It’s dropped faster than I thought and already almost there. There’s a 90-day lockup with insider shares I think, so that’s something to consider as well. I wonder if $24 isn’t a fair price to expect it to get to and jump in.

  7. […] Man and Money – Heard Anything Intersting about Facebook Lately? The Biz of Life – Facebook IPO at $38 a Share, No […]

  8. That’s a pretty good prediction of $30 Lazy Man. Honestly, I had no idea how the stock would do on the short term. In the long term, I don’t think Facebook will bring in the earnings to support this very high valuation.

    • Lazy Man says:

      You know, if I had actually tried to short the stock to make money on that $30 call it would have gone up to $50. Oh well.

      Long term, I think they get the earnings to support the valuation. The question is, how long is “long term?” ;-)

  9. Not that the IPO went well, but the best way I could figure out to get my hands on the money, also being a local, is to find a single engineer to marry who joined the company early on, but alas, I’m taken. In the meantime, I will continue to avoid Facebook stock like the plague and invest in Apple, so I too can afford a house in the Bay Area one day.

    • Lazy Man says:

      Well, you might have saved yourself some time and energy by already being taken… it didn’t work for this CNET employee: http://news.cnet.com/8301-1023_3-57435901-93/wanted-a-single-facebook-millionaire/.

      After Apple’s run up, I have to wonder if it is in some kind of bubble. They have the earnings to justify the price, but at some point, maintaining that growth seems difficult. I just don’t see Apple doubling again any time soon to become a 1.2 trillion dollar company. I see Google growing faster. As far as affording a house out here, there’s always Daly City ;-).

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