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  • Facebook, Many Questions Unanswered?

    With the much waited IPO approaching, many brokers, banks and financial advisors have been questioned by investors about the prospects of investing in Facebook. With a S-1 already available some information can be publicly be shared.

    Revenues 2011

    Facebook revenues in 2011 were USD 3.7 bln a +88% growth rate as compared to 2010 with the number of monthly active users growing 40% to 850 million as of December 2011 from December 2010. Operating income came at USD 1.76 bln, +70% over 2010.

    Revenue streams

    Facebook posted two main revenues streams on its prospects, the most important being advertising through their site but increasing faster and already representing 17% of total revenues, the "payments" division. Payments would be Facebook's subscribers that can effectively have virtual Facebook accounts in order to purchase virtual or digital products through Internet (games, virtual gifts, etc). To take the prospect example, in a social game such as FarmVille, a subscriber could buy machinery for his virtual farm through a Facebook account previously feed by the subscriber. Facebook would take some fee on this sale when passing through the results to the game developer.


    There will be 2 classes of shares with different voting rights, class B having 10 voting rights per share while class A with 1 vote per share. According to some estimates, the IPO will generate some USD 5 bln of resources, at USD 40 per share; the first estimates value Facebook at near USD 100 bln in the market value. CEO and founder Mr Zuckerberg will have 57% share control.

    Balance Sheet

    At the end of 2011, Facebook registered a USD 4.9 bln book value and cash balance plus investments were USD 3.9 bln with no debt.

    Some first thoughts…


    If the IPO is priced at USD 40 per share, the company will start with a market value nearing USD 100 bln, which represents roughly 27x trailing 12 months sales ratio or around 100x trailing 12 months earnings ratio. Needless to say that these ratios are much higher than currently public companies in the Internet sector such as eBay (trailing PE of 19x and price-to-sales at 3.8x) or Google (trailing PE of 20x, price-to-sales at 6.7x). The first question that comes to mind for an investor willing to put money into Facebook would be:

    How long can Facebook continue to run at these growth rates in order to justify the hefty premium observed in this IPO according to these data? To answer this question we have already some numbers: monthly active users (MAU) reached 845 million worldwide at the end of December 2011; which is already more than 10% of earth's population. We do not know yet if subscriber's growth rate has a significant impact or correlation with revenues growth rate, but running at +40% currently, MAU would reach total earth's population in less than 10 years. So the real question investor should ask would be: "Can Facebook sales continue to grow even if MAU growth stalls?" The payments division could be a new growth driver non-related to advertisement to support growth in the future. Is there any other business that could arise in the future to monetize such a 845 million rich subscriber base?

    Future prospects

    Is Facebook's business model sustainable for the long term? Facebook evolves in a very rapid changing world. Looking back at some internet successes of the past we have seen that landscape in tech generally can change rapidly. Facebook is being the first good example of that by making MySpace irrelevant in only few years in the social network space. The same happened to Yahoo! in the search field a few years ago. So will Facebook be the social media of the future and how can they monetize that to justify such high multiples?

    Company's shareholders.

    Facebook is coming to the market at a much more mature stage than it closest peers from internet in the past. The company do not really need money as mentioned above, and they are selling only 5% to 10% of the company to the public. That said, we will be in a situation where we will have a minority amount of individuals (Mr Zuckerberg and other private equity owners) controlling a significant major stake of the company and following this IPO, we will have a incredible amount on individuals chasing only 5% or so of the shares available. This situation might cause some scarcity effect following the IPO and make them even more expensive then it already appears, when looking at the aforementioned valuation ratios.

    Institutional investors

    With only 5% floating, the question remains if Facebook will be interesting for big institutional fund managers at these prices? And what will private equity owners, having already a big profit following the IPO do with their shares, or part of it, after the end of the lock up period? What will Mr Zuckerberg do himself with its 57% stake or part of it? How will hedge funds react to such a hyped IPO?

    Final Conclusion

    There are still many questions that are open and can't be answered right now. Those questions can have a significant impact on the share price following the IPO.

    Because the offering price and the exact number of shares offered are unknown, it's impossible to have an opinion. But looking at the hype and the high levels of valuation, savvy investors should take a cautious approach when investing money in Facebook following the IPO.

    This IPO could be marginally favorable to other internet names linked to advertising and internet, because the valuation gap between them and Facebook (according to recent published numbers) will make them look like a bargain.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: ipo-analysis
    Feb 08 4:39 AM | Link | Comment!
  • Why Fund Managers And Analysts Are Afraid Of Apple?

    Apple (NASDAQ:AAPL) blew out every single forecast last night, even the most bullish one, in terms of top line, margins and of course EPS. Earnings actually more than doubled and EPS at USD 13.87, +32% gap from consensus of USD 10.5. Price reaction following results in late section: +8% to +10%.

    After a small miss in iPhones sales last quarter, Apple offset it with 37 million iPhones sold during Christmas time, consensus was 30 million, even though we had an extra week during this quarter, the figure remains impressive, with more than 100% growth over the same time last year.

    iPad sales also came above consensus: 15.4 million units, exceeding consensus of 13.9 million and also growing over 100% from last year.

    The iPhone and iPad business have worked so well that according to this quarter publication both represents already 73% of Apple's total sales, and possibly more in terms of profits (but the company does not disclose profits by products).

    Guidance for the next quarter is above current consensus, EPS should be USD 8.50 vs consensus of USD 7.95. Wall Street consensus for the FY 2012 should be revised strongly up, from currently USD 35 to around USD 40 or plus. Finally, cash generation is strong as ever, USD 17 bln this quarter and cash and investments in balance sheet reached USD 97 bln this quarter, 25% of total Apple's market value. However, the company mentioned that no dividend for now, but they are opened to all possibilities to do with this cash going forward.

    Some math: Apple's PE ratio following the Q1 2012 results should be 10x, one of the lowest in the IT-sector that averages 12.6x. PE ratio ex cash = 7.5x, ouch !!! Market capitalization when Apple will trade this section will near USD 400 bln, comparable to Exxon's USD 417 bln as of the close of yesterday. EPS growth rate for 2012 should be near 50% after all brokers revise their numbers, so PEG ratio might be around 0.2x or 0.15x times ex cash.

    Despite the blowing numbers, the main question still is: Why the stock is up "only" 6%, with such low multiples and low risk ?

    I have 2 pillars of answers that I heard firsthand from fund managers and analysts today:

    1 The company got to big to continue to grow at this pace and would need a massive product launch in order to maintain it; and

    2 Most fund managers have already a maximum weight on Apple and it is difficult to add positions at this point, the company should urgently start to pay some dividend in order to attract new asset class investors and support stock price increases from here. But as long as they have enough growth to satisfy investors I think they will keep the "dividend wild card" for a weaker quarter publication.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AAPL, long-ideas
    Jan 26 5:57 AM | Link | Comment!
  • Apple Quality Deserves A Higher Stock Price

    Yes I am wrong right now. My emotion triggered me to sell Apple around $400 in October.

    Emotion is an important part of investing, I was reading too much about the smart phone market that got me confused. If I would have been a trader I could have made some money because the stock went below $370 at the end of November.

    One thing is for sure my next smart phone will be an iPhone 5. After four different Samsung phones it's time that I also experience the Apple way. Of course I can get a second hand one from friends, but I will patiently wait for the new blockbuster of Apple to hit the stores.

    A new research from Consumer Intelligence Research Partners (CIRP) analyzed the impact of the secondary market for the iPhone, the portion of used iPhones that are resold or given away when users upgrade to the latest models. The survey looked at customers purchasing new iPhones beginning with the iPhone 4S launch last October, finding that 53% of those users had returned their old phones to the secondary market.

    Of those old phones being put back onto the secondary market, the survey found that 49% were older iPhones, while 21% were BlackBerry smartphones and 15% were Android devices. Approximately two-thirds of those devices returned to the market were given away, with the remaining third having been sold.

    Breakdown of old devices reentering secondary market following new iPhone purchases

    The nice thing of this survey is that the quality of the iPhone is also statistically confirmed. People are not going to give their broken or half functioning smart phone to a friend, relative or colleague. My old Samsung phones are laying in a drawer and are screwed because the screen doesn't work or something else is wrong. Lifetime in my case two years. Thanks God my 4-year old girl likes these old phones but to give them away to somebody else no way.

    Quality has its price, but I was so emotional to sell a stock that will hit $800 the coming years. Maybe I get a chance to buy Apple (NASDAQ:AAPL) back after the Q4 results.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AAPL, long-ideas
    Jan 20 2:02 AM | Link | Comment!
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