Facebook's Expected IPO

By now I'm sure most of us have heard about the expected IPO of Facebook by latest 2012. I too was interested as my opinion is that Facebook is probably going to be to social networking sites what Google is to search engines. 

Why do I think so? Because firstly, I never liked social networking sites but for some reason I sold out and am now on Facebook as well. It's like back in the days of Altavista and Lycos search engines. I used to keep using Altavista despite Google's appearance. And for some reason I just decided to switch over. Google even became a word as in "Don't know the answer? Try googling it." And now, Facebook seems to be used in that context too. "Oh yeah I uploaded my pics. You can facebook 'em if you wanna take a look." or "Yeah, I'll be facebooking later. I'll add you then." That's a second sign of the importance this social networking site is becoming.

If I had known about investing back then in the days of multiple search engines, that would have been a big signal to invest my money in Google. That said, I think Facebook may grow like Google eventually for the reasons above. However, would the IPO price be a good price to buy in? For that I like to refer you to this article below written by Ed Pawalec of the Tycoon Report which I found most informative.

Enjoy!

~K

Another Brick in the Wall: Fool's Gold or Value Play?

by Ed Pawalec

News of Goldman Sach's investment in Facebook has been all over the news, so I thought I would play with the numbers a little to see if an impending IPO would end up being a scam or a value play when the company does go public.

The exact financials are vague at best at this point, and can only be guessed at by reports in the financial press, but we can have some fun with this anyway.

The value of the company according to a variety of reports is in the $50 billion range, which some have said is ridiculous. In fact, The Wall Street Journal quoted one former Goldman partner who was offered a piece of the action as saying, "Google's trading at 7 times sales. I'm not going to buy Facebook at 25 to 50 times." Interesting.

The valuation is based on the portion of the company to be purchased in a joint investment by Goldman Sachs ($450 million) and Digital Sky ($50 million) for $500 million. However, Goldman is also reported to have been putting together an additional $1.5 billion through a Partner Private Opportunity Fund, so how they come up with $50 billion is a little unclear. Nevertheless, I'll go with the $50 billion number.

Now, Mark Zuckerberg (Facebook's founder and CEO) is trying not to go public, which requires these investments to be bundled into Special Purpose Vehicles (SPV) so as not to go a foul of the SEC's 500 investor rule. Essentially, this requires any company that has 500 or more shareholders and $10 million in assets to file their financials with SEC, thus making it public information. This rule is rumoured to have been the motivation for Google to go public in 2004. If you have to report publicly anyway, why not do an IPO?

According to the rule, a company that exceeds that threshold must begin reporting within 120 days of the close of the fiscal year in which it reaches 500 shareholders. Since the current offering from Goldman, which could put Facebook over the 500 shareholder mark, is occurring in 2011, and Facebook's fiscal year ends on December 31, the expectation is for an IPO no later than April of 2012.

This might be avoided if the SEC accepts Goldman's SPV as a single investor. The SPV is, in its simplest terms, a group of investors clumped together as a single entity, which then invests in Facebook and is counted as only one investor. We will see how that works out. 

Enough with the background, lets jump into the numbers.


Who says a dollar isn't worth what it used to be?

For 2009, Facebook is said to have earned $200 million on revenues of $777 million -- a tidy 25% margin. For the first 9 months of 2010, reports are that the company is up $355 million on revenues of $1.2 billion -- an even better 29.5% margin. For all of 2010, estimates are for $500 million in earnings, which would suggest revenues of $1.6 billion.

Based on a $50 billion estimated market capitalization, that puts a PE ratio of 100 on Facebook. Seems a little rich by most standards. That being said, stocks frequently trade based on how fast they can grow their earnings and, assuming we can take the $500 million expected for 2010 at face value, Facebook grew earnings at 150% year over year. Maybe 100 times isn't too ridiculous if you make the assumption that they can maintain that growth rate.

Internet World Stats numbers Facebook subscribers at 517 million plus (as of Aug 30, 2010) compared to recent estimates of 600 million. I have to admit, either number is impressive. But, if you think about it: $500 million net income divided by 600 million subscribers means that each subscriber is worth $.83 to Mark Zuckerberg and his investors -- just under a buck per year.

Zillions of man hours wasted on Facebook each year so some 26 year old nerd from Harvard can make $.83 on each user.

Think about that.


Critical Mass

But you have to give the guy credit for finding 600 million people he could squeeze $.83 out of.

Hold on a minute! How many people are on the planet?

Well, recent estimates are in the neighbourhood of 6.8 billion. By 2020 there will be about 7.7 billion people, and most of these would need to be worth at least $.83 for Facebook to be fairly valued at $50 billion today. But you can't have Facebook without the internet, and not everybody in the world is wired ... at least not yet.

Unsurprisingly, the growth in the number of internet users has dropped considerably over the years ...

With the number of users doubling every year during the heyday in the late 1990's, things had to cool down. Over the last five years, growth has steadied to a strong 13-15% annual rate. Again, according to World Internet Stats, nearly 2 billion people have internet access. Almost 29% of the world is wired for the web and 26% of them use Facebook, each worth $.83. 

Now if internet access continues to grow at a 13% rate for the foreseeable future, sometime during 2021 every person on earth will be connected to the web. Yes, you will be able to check your Facebook page from anyplace in sub Saharan Africa, as long as there are people, by 2021 ... maybe not. 

Since Facebook is just about 7 years old, its growth rate has been exponential. For argument's sake, however, let's just say that it can grow subscribers at a 25% annual rate. By early 2023, everyone on earth, who has already had the internet for two years, will now be available for friending on Facebook. 

While this is clearly something to look forward to, stay with me -- I do have a point. In this outlandish scenario, with the world population valued at $.83 a head, and if Facebook kicks all of its earnings back shareholders, it becomes a perpetuity. This means that the present value of the company can be determined simply by choosing a discount rate. Since we are talking about just over 10 years, the approximate 3.4% rate on the ten year note is as good as any. And the calculation goes:

(World Population in 2021 x $.83) / 3.4% =

(7,900,000,000 x .83) / .034 = $192.85 Billion

Before you deem this exercise silly, think about a more feasible scenario:

If by 2021, half the world is wired and half of them use Facebook, using this same crude calculation the numbers come to $48 billion, which happens to be darn close to the $50 billion number being bandied about these days. 

The point here is that Facebook is a unique company in that it actually has the potential to reach the entirety of the internet capable world and therefore, to its detriment, it does have a maximum value that can be calculated. I realize that the company could increase its per subscriber value and that the discount is somewhat arbitrary, but I found it interesting how doing some back of the cocktail napkin math came so close to the value ascribed by the pundits and analysts. 

In any event, at least now you have some idea what it would take to make this company worth $50 billion today.

Starhub: Opportunity to Buy In May Be Near at Hand

In my last post on Starhub, (refer to Starhub Breakout in the Making?), I mentioned then that the opportunity to buy into the stock may have arrived but a dip to $2.63 may find it back in the downtrend channel. Prices did drop back and no confirmation of a breakout resulted, with prices dipping even lower currently to $2.57. 

That said, I also noted that the 100 day moving average has been providing strong support allowing prices to bounce up on the 21st of Dec to attempt breaking out of its downtrending channel. This didn't occur unfortunately. However, if we look at the chart, the opportunity may be close by. 

The 100dma has met the upper regions of the downtrend and may provide that extra push to prevent price from falling further. That said, indicators don't show any evidence that prices will head higher any time soon. Volume too, is much lower than the previous selloff on the 17th of Dec that resulted in the ugly black candle hinting at the probable lack of sellers. As such, we may find prices hovering around this region, bouncing from its 100dma support to its resistance at $2.65 before attempting a breakout. In other words, a triangle may result. 

As an income stock, with a dividend yield of 7.4% and a p/e of 13.8, Starhub is rather attractive as compared to its peers. However, maintaining its 20 cent/share dividend remains something of a concern to analysts.

Vested,

~K

Comfort Cab Speeding Up Too Fast?

On the 24th of Dec, I took a look at ComforDelgro's chart. Refer to Comfort Delgro's Climb to Resistance Looking a Tad Weak.  This was what I said I feel would happen, "my opinion is that prices may drop in the near term to its next support at $1.52 - $1.51." On hindsight now, this didn't happen. The 14 day moving average played a stronger support that I expected. I did also state that the ADX showed the selling trend was weak. This was probably a good clue that prices would hold up at the 14dma. A lesson on my part. That said, it did take one more dip back to the 14dma support despite crossing through the noted resistance at $1.57 showing that the initial challenge was indeed "a tad weak" and therefore heading for a mini-pullback.

I also stated that "as the market sentiment seems to be getting more bullish, my guess is that it would only be a matter of time before they push through the $1.57 resistance." Here's how that played out so far.

On the 06th of Jan, the resistance was finally taken out after hovering around the resistance for another week. If you notice, the 14dma has been providing strong support through the whole affair. Like any other breakout, this cause share price to spike leading it now to challenge its next resistance at $1.63. 14dma though, has yet to catch up. Some bulls are mighty optimistic. In the longer term, I'm convinced that they've every reason to be as the market sentiment is still bullish but in the short term, lets take a look at the indicators to gather the information.

Stochastics for one, is in the overbought region. Also, it has given a sell signal. RSI and MFI looks to be heading into overbought region as well. MACD however is still trending upwards, along with OBV. ADX indicates that buy momentum is rising but the trend strength is currently weak.

My take: As the 14dma has been providing strong support thus far, I expect this to continue. However as momentum is still positive, it is likely that instead of prices dropping back to its 14dma at $1.57, prices will continue hovering for the next couple of days while awaiting the 14dma to catch up with it. My estimate is for prices to bounce between $1.59 - $1.63. I do not expect the $1.63 resistance to be taken out just yet. With a P/E of 15 and yield of 3.25%, anyone buying into this for dividend yield may find SBS Transit a more enticing buy at the moment with a lower P/E and a better yield.

Not vested in either,

~K

I Thinketh! - Do Children Today Fear Failure?

It's a week after New Year. School has started. My girlfriend had to go back too. She teaches. The week past by fine. Then on Friday, something happened that left her thinking, which she told me about. That left me thinking. 

Once orientation's done in the first two days or so, lessons start. On Thursday, she was relieving a couple of periods for a teacher who was away for some reason or other. It was math class. After explaining the steps of the new topic and giving out the assignment to the new batch of primary 1 students, two students cried. One after the other. Apparently, they were afraid of making mistakes in their work. And that bothered them enough to cry. Needless to say, she had a lot of reassuring to do. So that was the incident that left us both thinking.

Why are kids afraid to make mistakes? As a child, these are the times to make as many mistakes without shame. It's their learning years. They're entitled to their fair share of mistakes. 

Or are they? 

This led to a sensitive and controversial question. Are kids being raised to feel ashamed of making mistakes? 

And to end the questions: If they're so afraid of making mistakes at their young age, how about when they're older? How will they handle their personal challenges that require some guts be it in career or in relationships?

Mistakes are part and parcel of how we learn and improve. Observing the failures of others also helps better ourselves. To paraphrase a quote I remember reading once, "A smart man learns from his mistakes. A smarter man learns from the mistakes of others." 

To conclude this little thought with a personal opinion, kids need their parents' support and assurance that it's perfectly fine to make mistakes. As long as they learn, pick themselves up, dust themselves off, move on and try again, it's alright. In doing so, they learn a lot more than just the lesson of the task. They get additional lessons in determination and letting go. Lessons in dealing with success and failure.

It's how we live. 

It's how we grow.

I learnt to cycle that way.

Food for thought,

~K