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The name "Dutch Trader" refers to The Golden Age. This was a period in Dutch history, roughly spanning the 17th century, in which Dutch trade, science, military and art were among the most acclaimed in the world. Dutch ships hunted whales off Svalbard, traded spices in India and... More
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  • Facebook And Mark Zuckerberg's Letter 0 comments
    Sep 6, 2012 3:51 PM | about stocks: ZNGA, FB

    I was amused reading Henry Blodget's article on Business Insider stating that no one actually reads Facebook's IPO prospectus or Mark Zuckerberg's letter to shareholders. I read the IPO but I don't think many other investors did. Why? Because it wasn't necessary.

    Everyone knows that Facebook (NASDAQ:FB) was way overvalued. Despite that many investors believed the stock would arise to levels not seen since the Dot.com boom, so investors could make a decent amount of profit. However, not all of them. The absence of many private investors was one of the reasons why Facebook's IPO was a complete failure.

    Many institutional investors are now loaded with stocks which are not attractive at all. In the Netherlands retirement funds lost millions of dollars on Facebook. In that sense Henry is right, many Chief Investment Officers didn't read the prospectus and were lured to take part of the biggest internet IPO ever.

    Wall Street's Facebook IPO hype machine did a great job, but investment bankers forgot to read page 73-76 of Mark Zuckerberg's letter.

    Some highlights:

    Facebook was not originally created to be a company. It was built to accomplish a social mission - to make the world more open and connected.

    So making a profit doesn't seem so important!

    There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future. The scale of the technology and infrastructure that must be built is unprecedented, and we believe this is the most important problem we can focus on.

    So costs will increase!

    Even if our mission sounds big, it starts small - with the relationship between two people.

    Indeed, a relationship. But not the relationship investors had hoped for!

    We have already helped more than 800 million people map out more than 100 billion connections so far, and our goal is to help this rewiring accelerate.

    Connecting doesn't necessarily mean making profit!

    One result of making it easier to find better products is that businesses will be rewarded for building better products - ones that are personalized and designed around people. We have found that products that are "social by design" tend to be more engaging than their traditional counterparts, and we look forward to seeing more of the world's products move in this direction.

    Let's see! Hopefully businesses don't run away.

    Our developer platform has already enabled hundreds of thousands of businesses to build higher-quality and more social products. We have seen disruptive new approaches in industries like games, music and news, and we expect to see similar disruption in more industries by new approaches that are social by design.

    Social by design, but what's in it for me as an investor!

    A fantastic letter but not well read by many professionals.

    Some background information

    Facebook is the worldwide leader of "social media". Although not the 'first in place', Facebook quickly took market share from other competitors such as Myspace to became a gorilla in the Internet space in less than 10 years with currently near 1 billion active users worldwide.

    The company was IPOed mid May with a market value of over $100 billion and with an absurd valuation of around 100x past 12 months earnings.

    Fundamentals should start to take over and Facebook will need to prove to investors that it can be able to

    One: keep the lead in the social media network over time and

    Two: monetize its incredible active users base of nearly 1 billion individuals and companies to justify a high valuation level.

    Final Note

    Today's business model is based on a free subscription for users, the company capitalizes on selling advertisement for companies through its subscriptions base, and individuals can go to the companies Facebook page or just click on banner ads. Because Facebook has a significant amount of information (details) about individuals, the ads can be very sharp in terms of targeting.

    Another part of the business, which represents about 17% of total sales today but hopefully will increase, comes from "online games'. Facebook subscribers can play through Facebook platform online games developed by third parties, such as Zynga (NASDAQ:ZNGA). As users buy features for these games through Facebook credits and Facebook will take a fee on these purchases, such as a broker, and will give away the other part for the game developer.

    Facebook will need to develop other sources of revenues in the future, such as a premium subscriber offer in order to provide paying services for the communities (a larger photo and video space, special features…).

    To justify a P/E above 35 for 2012, it needs growth: internal and external. I don't see it happening this year and suggest to wait buying shares until the shares dip around ten dollars.

    Valuations / Ratios

    Next Dividend paymentn.a.Earnings Announcement Date
    (previous year)
    29-02-2012
    Exp. Dividend (curr. year)$0.00Earnings Announcement Date
    (current year)
    27-02-2013
    Dividend Yield (%)0.00%EPS (curr. year)$0.49
    Price/book ratio (curr. year)3.46EPS (next year)$0.63
    ROE (prev. year)24.19%P/E (curr. year)36.85
    YoY EPS growth (curr. year)-1.94%P/E (next year)28.66

    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.

    Themes: short-ideas Stocks: ZNGA, FB
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