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Facebook: investor friend or foe?

Analysts speculate about social-media giant IPO

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It's often said you should invest only in what you know. That being the case, a lot of Facebook users may 'like' what they see when the social-media giant becomes a publicly traded company later this month.

Analysts expect Facebook's market value will be between $77 billion and $100 billion when its highly anticipated IPO (initial public offering) takes place May 18.

Expected to be listed at between $28 and $35 a share when it begins trading on the NASDAQ exchange (ticker symbol: FB), it would be the largest tech IPO in history, possibly raising more than $10 billion for the company.

The expectations are high and for good reason.

Facebook is a pioneer in social media, now with an empire of almost a billion users.

And it has remarkable financial growth, too. In 2011, Facebook had revenue of $3.7 billion, up from $1.9 billion from the previous year.

But does popularity -- or even profitability -- make a company a good investment?

This question -- along with others concerning how social media are shaping our world -- will be the focus of a special event hosted by Union Securities next Saturday at the Winnipeg Free Press News Café.

Titled Facebook IPO: Fad or Phenomenon?, the event will feature Free Press publisher Bob Cox discussing how news agencies are evolving to keep pace with social media's rapid growth and increasing importance.

From an investor perspective, however, it's also an opportunity to delve into Facebook's potential against the broader context of the tech sector itself.

Many sector onlookers are likely trying to measure whether Facebook is merely a fad or, indeed, a phenomenon worth watching, says Joseph Alkana, an investment adviser at Union Securities in Winnipeg.

"The fad argument is that we're looking at another type of technology bubble," he says.

The original tech bubble burst more than 10 years ago, burning many investors who bought shares of highly touted companies that initially soared in price, only to crash within months of being listed. Firms such as Etoys.com and Pets.com sucked billions from investors and now serve as cautionary tales about the dangers of getting too amped up about investment fads without considering if the fundamentals -- such as generating revenue -- support the hype.

Yet not all tech firms' promises of gold have turned to dust. There's also the 'phenomenon' side to consider such as the successes of Amazon and Google.

"This is the potential upside -- and for Facebook, it is that nearly one in seven people in the world uses it," Alkana says.

More than a decade ago, the numbers didn't back up the hype behind many Internet-related companies and other tech darlings.

"With the previous tech bubble in 2000, you had about 20 million to 50 million online and most of them were using dial-up," Alkana says.

These days, you can make a strong argument for the tech sector reaching critical mass. Some of the largest publicly traded companies are tech and Internet firms. Apple, Google and even Microsoft -- what you might call successful tech sector 'phenomena' -- do not suffer from a lack of users.

Billions of people now have Internet access, and a large portion of them are Facebook users who 'like' using the social network a heck of a lot.

It's estimated one out of every seven minutes spent on the Internet is on Facebook, says Dushan Batrovic, senior technology analyst at 4Front Capital Partners in Toronto.

"You just don't find that level of user engagement in one place anywhere else on the Internet," he says.

"That's a lot of time to try to monetize in different ways."

To boot, Facebook has already proven it can make money -- a lot of money. Its operating income -- profits left over after subtracting the cost of doing business -- was $1.7 billion last year, up from $1 billion in 2010, says Ranjit Narayanan, senior analyst for tech-equities research at Union Securities in Toronto.

"That's solid growth, and it will be reflected in its IPO price," he says.

One concern for investors, however, is whether its profitability has made the market too willing to pay a premium for a slice of Facebook's ownership pie.

If Facebook's market value is $100 billion, for example, and profits are about $1.7 billion, this would suggest the market is willing to pay more than $50 for every $1 the company earns.

That may seem as if Facebook is grossly overvalued, but it's not what Facebook has done that drives its worth. It's what it could do.

"A stock gets a premium multiple when it can have the ability to show a lot of growth," Narayanan says.

Growth is the name of the game in the tech sector and Facebook is definitely player material. Its revenue grew by more than 90 per cent from 2010 to 2011.

In some cases, however, tech companies do not even need revenue to generate substantial market value.

The only fuel needed is the anticipation of growth. The photo-sharing application Instagram might have been a potential IPO that created a lot of buzz despite having no revenue, if not for Facebook buying it up for $1 billion a few weeks ago.

What Instagram did have, however, was users -- 30 million of them -- and users have become one of the main metrics for estimating a social-media firm's potential future value, Batrovic says.

Facebook, however, is unique. It has the users and revenue. And it is following in the footsteps of other recent and IPOs for social media firms such as LinkedIn, Groupon and the music site Pandora Media.

But only LinkedIn has been profitable -- albeit marginally so -- for investors, and that can largely be attributed to the fact it serves the corporate world. This is often a tried and true path to success in tech. Many sector giants have built their empire by serving business clients.

"They have the dominant footprint and it's tough for new entrants to dislodge them," Narayanan says.

The consumer technology market is a different animal altogether. BlackBerry maker Research In Motion knows this painfully well. It dominated the business segment, but its foray into the consumer market has nearly been its downfall.

RIM is likely still around today only because it has had such a good foothold on the business market, Batrovic says

"But even that market isn't as safe as it once was."

Facebook's milieu, however, is the consumer market. It already has the advantage of a massive user base, a prospective gold mine of data for advertisers.

Still, the company walks a fine line between using this information to generate revenue and protecting user privacy

"If you make those ads too intrusive, for example, then it might interfere with how people view Facebook," Batrovic says.

But the company needs to keep growing both its users and revenue if it's to remain successful -- IPO or not.

To do that, it has to be visionary -- such as Bill Gates with Microsoft and Steve Jobs with Apple were, Narayanan says.

Facebook's founder, Mark Zuckerberg, may be just that, and the recent hiring of Sheryl Sandberg as chief operating officer -- the woman who made Google profitable -- demonstrates the company is forward-looking.

It has to be -- because rapid growth is only sustainable for so long, especially in the consumer market.

"Anything related to the consumer is very fickle," Narayanan says.

"What's hot today may not be three to four years from now."

 

-- -- --

 

Correction to last week's column: The April 28 print edition of Money Matters, entitled Golden years indeed: How to profit from the pricey, precious yellow metal, incorrectly stated an ounce of gold weighed about 28.4 grams when in fact an ounce of gold weighs 31.1034768 grams -- or about 31.1 grams. Weights for gold and other precious metals are measured in troy ounces rather than avoirdupois ounces, the standard measure for most other substances.

giganticsmile@gmail.com

How to get a piece of the action

INITIAL public offerings are offered through brokers and online discount brokerages, but hot IPOs such as the expected listing for Facebook can be difficult for the average retail investor to purchase at the offering price. It's often institutional investors such as pension funds or investment banks that get the lion's share of access to purchasing stock of highly anticipated IPOs, says Ranjit Narayanan, an analyst with Union Securities. "But they also allocate a portion to retail investors because you need both institutional and the retail for optimal liquidity," he says. "The retail investors trade more often than institutional investors, who tend to want to buy and hold a stock."

 

Facebook IPO: fad or phenomenon

Saturday, May 12, Winnipeg Free Press News Café, 237 McDermot Ave.

Breakfast at 10 a.m.

Question and answer at 10:30 a.m.

To reserve a seat, call Adam at 982-0010 or apukalo@usl.ca

Got this Thursday free?

UNION Securities is co-hosting another investor education event at the Winnipeg Free Press Café on May 10 called Sell in May and Go Away? Seasonal Trends and Investing. The featured speaker is Brooke Thackray, president of AlphaMountain Investments, writer of the Thackray Market Letter and research analyst for Horizons Exchange Traded Funds' Seasonal Rotation fund. A leading expert on seasonal investment, he will discuss how equity, commodity and bond prices fluctuate in predictable patterns at different times of the year, the result of cyclical market and economic forces that affect various industrial sectors. Start is 7 p.m., followed by question and answer at 7:30. To reserve a seat, contact Adam at 982-0010 or apukalo@usl.ca .

 

Can't make Thursday, but you want to learn more about seasonal investing? Check out the May 19 edition of Money Matters featuring an interview with Thackray discussing the ins and outs of seasonal investing.

Republished from the Winnipeg Free Press print edition May 5, 2012 0

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