Buying a share of Facebook (FB) is less an investment in the company itself and more a bet on Mark Zuckerberg being the next Steve Jobs. Since 'The Zuck' owns 57% of the voting shares in Facebook, he has dictatorial control of business decisions. By investing in FB, you are depending on those decisions to deliver significantly given the current market valuation.
Instagram, The Zuck's First Major Purchase
The first example of the type of decisions that will be headed our way from The Zuck is the recent $1B acquisition of Instagram, a fledgling photo sharing service.
Instagram is a service that has been around since October 2010 and quickly gained a strong customer following. Before the FB acquisition, the company claimed a membership of over 30 million customers.
While the growth was obviously explosive, the financials of the company were questionable at best. Since the program was distributed for free, there was no direct revenue from the users. As far as I can tell, there was actually no revenue whatsoever being generated by the company.
Instagram appears to operate as Twitter for pictures. If Facebook wanted to, it could possibly expand that into a true Twitter competitor with relatively little effort. Since Twitter is currently receiving funding based on an $8.4B valuation, the $1B price tag paid for Instagram could turn out to be a steal.
The 30M users is nothing to scoff at, but the price paid for the company is simply crazy, unless you believe The Zuck knows best. The Zuck made Facebook, The Zuck grew an idea in a field of competing social networks and came out on top. Obviously he got something right and as with all such success stories, his future is currently being plotted against former successes like Steve Jobs.
Zuckerberg-Jobs?
In the heady days of 1980 when Apple (AAPL) went public, Steve Jobs was essentially a crusading maniac. His enthusiasm was electric and his disdain for Wall Street was palpable. After the IPO, Jobs started on the Macintosh and took the company along for what would prove to be a bumpy ride. His decisions regarding Macintosh, while creating great technical products, were not generating the results that the business required and forced a combative culture between the two main product lines. By 1985, 5 years after the IPO, Jobs was relieved of all managerial duties by the Board of Directors and resigned.
The Jobs of 1980 was a completely different manager from what we regard as "Steve Jobs" now. There was immense personal growth between 1985 when he left the company and 1996 when he returned.
Investing in a 25-year old Steve Jobs during the AAPL IPO was not a wise decision. During his tenure as CEO, AAPL opened at $3.59 (split adjusted) in December 1980 and was down to $2.23 (split adjusted) for a 38% loss in value when he resigned 5 years later.
The decisions that he made within the company jeopardized the fundamental structure by creating oppositional product lines between the Lisa and Macintosh products. The board was right to send him packing. He was simply not ready.
Buyer Beware
Facebook, even after the recent sell-off is still priced extremely richly to its growth rates. Price to sales stands at 22 and TTM PE is 81. Even the 5 year PEG Ratio is high at 1.67. Top and bottom line growth is already well below trend and projections are not encouraging. To achieve the results necessary to justify these metrics, Facebook will have to go on a run not seen since Jobs returned to Apple.
With growth already slowing and natural limits of the user base nearing, the company will have to make a move into new markets. With Instagram and Karma, it appears mobile is next on the list. Many have proposed that e-commerce is soon to be on the docket as well. If FB can achieve the success that it has seen so far in either of the two segments, those holding long positions now may be vindicated within the next 5 years.
Of course that is all based on a continuing belief that The Zuck, at 28, will be able to deliver results that it took Steve Jobs almost 20 years of maturation to achieve. The Zuck has a history of doing what he wants, when he wants when it comes to the company. During the IPO roadshow he didn't feel like showing up, so he didn't. His justification to shareholders for paying $1B for a 19 month old company with no revenue, no assets and 13 employees?
Essentially: "It'll let you make your photos look kewl!"
There is the possibility that it may prove to be a genius move. It will have to be, to justify the current premium that everyone is pricing in to the shares. Usually untried CEOs with dictatorial control do not have such lofty multiples assigned to their stock.
Right now everyone is hoping that The Zuck is the next Steve Jobs. I am almost certain that they are all using the Steve Jobs circa 1996, not 1980, when they picture the comparison in their minds. Steve Jobs himself said that his forced departure was the best thing that ever happened to him. Will we be seeing future statements coming in a few years from The Zuck?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
