Facebook: When Ownership Matters

| About: Facebook (FB)

SEC filings the past couple days revealed that Peter Thiel, Facebook's (NASDAQ:FB) key original investor, has sold most of his shares, and co-founder Dustin Moscovitz sold 450,000 shares in the past week. Business Insider recently published this excellent article that makes a solid case for continued downward pressure on the stock due to share lockup releases, billions in withholding taxes, and challenges with employees whose stock options are under water, and Thiel's selling upon release of lockups fit this prediction perfectly.

Factor in revenue stumbles in dealing with the transition to mobile and the continued migration of Facebook away from being the "cool" choice, and it's easy to make a case for Facebook following the downward path of many internet predecessors. But one factor to consider is this:

Mark Zuckerberg owns Facebook.

Not totally. He doesn't even own a majority, or control a majority of shares (although share structure and his voting rights agreements give him de facto control of the board and the company).

The more important thing in my opinion, is that Zuckerberg still has emotional ownership to go with his financial and managerial ownership. He cares a great deal about making Facebook the number one social platform on the planet for a long time. Amongst his many quotes: "Our goal is not to build a platform; it's to be cross all of them.". Globally, no doubt.

And thus Zuckerberg is the latest in a long line of American entrepreneurs who took an idea global, and made the planet better for it: Rockefeller, Disney, Kroc, Gates, Jobs, and many others. In our capitalist system, their goals of becoming- and staying- number one drove them to ask "what can we do today to give us an even larger edge?".

In Zuckerberg's case, this should translate to new ideas leveraging Facebook's advertising reach, payments capabilities, and the massive amount of information they are collecting. How Facebook handles privacy, deals with fraud, and maintains branding that appeals to the most profitable market segments will be critical to their success, but these are mature issues.

Trying to quantify just how big this success could be:

1. Assume they capture 50% of TAM (Total Available Market)= 2 Billion (approximately half of internet users worldwide, Windows is estimated to have over 75% share of operating system TAM;

2. x 12 months/year

3. x $4/month (while Facebook has said they would not charge for access, is it that hard to think up a product beyond access, let alone a few, that could be as worthwhile to consumers as a mocha that sells for that in Beijing?)

4. x 35% profit margin (Google's was 32% last quarter, and while this is high, we're talking potential here)

5. = $33.6 Billion in profit per year...for moving bytes, which is as scalable a business as there is.

Put on a conservative multiple of 15, and we're talking a half a Trillion dollar valuation- or $250/share. This would not require breaking the laws of physics, just great new product. Zuckerberg and a lot of very smart people are certainly trying to figure out what this is, with a lot of resources to back them up. This is about pride.

And the main point here is this: the history of America's global entrepreneurs shows that for every initial great product- oil, Mickey Mouse, hamburgers, Basic, the Apple II- there can be many, many more- gasoline, Big Macs, Windows, iPhone... Zuckerberg no doubt wakes up every morning thinking about this, and there are too many smart people involved for Facebook to not figure it out- eventually. And with interest rates being what they are, the portion of the discount factor derived from whether this development happens next year or in five years is a pretty small factor.

So, as bad is it may get (and it may get really bad) over the next year, I believe a long term position in FB has reasonable chance to reach $80/share in the next five years, as long as Zuckerberg and his team continue to focus on doing great things.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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