Should You Buy Facebook Shares? Read This FirstBy Alex Dumortier, CFA, The Motley FoolPosted 2:07PM 05/17/12
"I would invest in Facebook; I don't care what the opening price is."-- Steve Wozniak, co-founder, Apple (NAS: AAPL)
"If you're a growth investor, you more or less have to own [Facebook] and hold your nose at the initial price." -- Lawrence Haverty Jr., Associate Portfolio Manager, The Gabelli Multimedia Trust
If you're the billionaire co-founder of the most successful tech company in history and you simply have to own some shares in the hot new technology company, go ahead and buy shares without any consideration for price. If you're a growth-fund manager and your primary concern is minimizing your career risk, it's "Damn the torpedoes -- full speed ahead!"; after all, unlike Admiral Farragut, you're not actually in the boat with your investors. If you're neither and you invest for profit rather than entertainment, I urge you to hear my appeal: Observe, don't participate, in Facebook's IPO. Climb aboard my bubble machine! Price matters. How did the bankers come up with their valuation for Facebook shares? They used three methods, but the one to which they assigned the highest weighting -- 50% -- simply amounts to looking at the most recent prices at which the shares changed hands in private markets open to qualified investors. This has produced a massive "greater fool" dynamic, as each round of "investors" anchors on the price paid at the preceding stage:
Stage one: Qualified investors are eager to buy shares in the private market. Why wouldn't they be? It's a nearly sure thing the stock will appreciate once it becomes publicly traded.
Stage two: Bankers award a favored group of investors shares in the initial public offering. The bankers' indicative valuation is largely based on the prices paid in private share markets. IPO investors expect that the shares will pop once they hit the secondary market.
Stage three: It's a stampede as investors (including numerous individual investors) who couldn't get in during stages one and two finally get the chance to get their hands on some shares, sending prices higher yet. At this stage, investors will need to find a greater fool (small "f," mind you) to realize a quick profit, but they risk running out of fools and becoming the greatest fool.................
How Facebook Could Be Worth Far More Than $100 Billion
By Tim Beyers, The Motley Fool
Posted 3:07PM 05/17/12
I've said before that I'm interested in buying shares of the Facebook IPO. I'm still interested, even though my earlier prediction -- that the social network would command a $50 billion valuation -- now appears to have been off by about 50%.
Some see that as a problem. How could Facebook's $4 billion in annual revenues be worth $100 billion when Apple (NAS: AAPL) nets just five times as much market value while producing 35 times as much revenue? Google's (NAS: GOOG) $40 billion in sales is worth just $200 billion in market cap. And don't forget Renren (NYS: RENN) , China's version of Facebook. The social-networking site is profitable and using Groupon-style tactics to milk revenue from its 147 million active user base, yet commands less than $3 billion in U.S. market value. There's virtually no precedent for Facebook's stunning valuation, but there is a theory.
It's called Metcalfe's law, which states that the value of a telecommunications network is equal to the square of the connected nodes. Credited to Robert Metcalfe, founder ofHewlett-Packard division 3Com and one of the originators of the Ethernet networking protocol we depend on as modern Internet users, the theory describes the geometry of network effects. There's value to the idea. Network participants create value when they interact with each other. Thus, more participants create more value, as has been the case at eBay(NAS: EBAY) throughout its history. Facebook benefits from similar math. The larger the social network gets, the more valuable its data and advertising platform becomes. Enter Metcalfe's law. According to the formula, Facebook's 900 million active users compound to create a network worth 8.1 x 10 to the 17th power, or $8,100,000,000,000,000,000. Crazy, you say? Undoubtedly, especially since Metcalfe's law was originally intended to describe the value of fixed cost nodes rather than human participants with varying behaviors..............http://www.dailyfinance.com/2012/05/17/how-facebook-could-be-worth-far-more-than-100-bill/
No comments:
Post a Comment