patrick.net

E-man says

Saw this on the news yesterday evening. Facebook going public will create over 1,000 new millionares.
Cool. :)

If I was in the SEC or General Consel for FB, i would be very interested in how confidential info was leaked to the public. CEO/CFO would be panicking today... or is it just journalist hype!

SJMN headline today.

http://www.mercurynews.com/business/ci_19862712

Facebook IPO to spark valley economy

Realtors talk of new boom etc etc...

and here is the hook at the end of the article!

"Timing also plays a role in Facebook's economic impact. Employees are expected to have a 90 to 180 day "lockup" period in which they can't sell their stock after the company starts trading publicly. If Facebook starts trading in mid-2012, it could be 2013 before employees can begin to liquidate their holdings.

.

Most experts agree the economic benefit will filter out gradually, in part because many Facebook employees have already sold some of their shares on the secondary market.

Another limiting factor will be whether those who still hold large amounts of Facebook stock decide to stay in the Bay Area.

Michael Spector, CEO of Vista Wealth Management, said several of his clients who were early Facebook employees have already moved to states like Washington, Florida and Texas to avoid California income tax.

"There is a big wave" of wealth, Spector said. "But I've got to tell you that wave of wealth, most of those people did not build their lives here" and may leave."

Yep! they leave.. like the dot.com bust .. I told you so...

One Word: "Myspace"

The lockup is pretty standard. It allows a good amount of time for the stock to fall before the employees can get out.

I doubt the efficacy of Google/Youtube advertising, when I click on Iron Maiden music videos and get ads for Tampons or the newest album from Mariah Carey.

Why do people keep claiming that facebook sells data to advertisers? They don't. Advertisers never see any data. They pick the demographics that they want to target, and facebook serves up the ads.

Same deal with Google, only with "actions" (search queries) being targeted instead of demographics.

Anyway, facebook isn't really being that overpriced when compared to other stupidly priced companies; they'll be at about 95 P / E, vs. Amazon at 130.

I would say that, in 2 or 3 years, people will get a bit more realistic. By 2015 FB will be earning somewhere in the range of $5B a year, and will be priced at around $100B.

It's pretty much a no brainer to buy it early if you can though. A post IPO bump is just about guaranteed due to stupidity.

Monkeyswing says

Humanity needs something way cooler and monumental than status updates and relationship status.

Patrick.net!

Real discussion, though not real identities.

Kevin says

Anyway, facebook isn't really being that overpriced when compared to other stupidly priced companies; they'll be at about 95 P / E, vs. Amazon at 130.

When we had a real tech boom in the 90s the returns were around 10-15% annually on the S&P with PE at 30. Anything over 50 was considered insane... and so is your 95 today.

The vast majority of IPOs were rationally priced and had to earn any increase in prices based on actually earnings not some pie in the sky story. High PE multiples cause a lot of problems and distractions for companies and employees we all rather not have.

You gotta love America,

The only place in the world that normal joe employee working for a corporation can get rich.

138M ISO @ $1 (or fourty bagger)
380M RSU issued

518M Shares and counting. Based on $40 a share, employees are sitting on 20B in pay.

3K facebook employees translate to 6.67M per head

Yeah, pretty safe bet there will be at least another 1K new milloniares and millionaires will probably be multi millionaires.

Which brings up another question, How the hell does employee sitting on 20B in pay yet claims an operating profit. US GAAP accounting is idiotic.

http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm

Kevin says

Why do people keep claiming that facebook sells data to advertisers? They don't. Advertisers never see any data. They pick the demographics that they want to target, and facebook serves up the ads.

Perhaps you are right. I can certainly see the motive for Facebook keeping the information it collects proprietary. It would allow them to monopolize the industry the way the MLS allows the NAR to monopolize real estate.

However, there are many reports alleging that Facebook does sell some data. I wouldn't be surprised if they disclosed some information to third parties at part of deals.

In either case, I think it's the collection of personal information by Facebook that's scary. Even if you try to use Facebook anonymously, by not including your real name, various software components will attempt to identify you. For example, if you ever use a mobile app to connect to Facebook, you can pretty much assume that the app will disclose your actual phone number, which can be used to identify you.

@Dan

The problem is, advertisers get masses of information, they target it exactly to their demographics, for a very cheap price I must add, and the users ignore them. The users are there to update their status, post a picture, or read about other status updates. They're not interested in doing anything else, or any other interactions. Advertisers are trying to figure out what to do with this cheap advertising, but they can't even get any actions out of these users. It's better for them to spend the money on google, where they get actual results. There are *a lot* of players trying to make something work on facebook, and they're all struggling to find something.

But then how is it that Facebook has a 40% profit margin and billions in cash? They must be doing something right with advertising.

SFace says

138M ISO @ $1 (or fourty bagger)
380M RSU issued
518M Shares and counting. Based on $40 a share, employees are sitting on 20B in pay.
3K facebook employees translate to 6.67M per head.

There is NO WAY to translate per person what the ISO or RSU option are. There are only a few people who know the actual numbers.

If MZ took any suggestions/mentoring from Steve Jobs, it would be not to give out lots of options to employees. Too much $$$ changes people and frankly like I said.. they leave and you need to find replacements. We are not talking 1-5 people by more like near 70% turn over in a very short period of time.

What would you do if you were Mort (CEO)... put your thinking hat on and zip up, stop wanking off over the keyboard...

thomas.wong1986 says

What would you do if you were Mort (CEO)... put your thinking hat on and zip up, stop wanking off over the keyboard...

All Mort has to do is look across the street at Google becuase they went down that road 7 years ago. Google 2012 has more brainpower and profits than Google 2005.

SFace says

All Mort has to do is look across the street at Google becuase they went down that road 7 years ago. Google 2012 has more brainpower and profits than Google 2005.

And prices of RE even today are falling. You cannot compare what happened with 1-2 comapnies like google or facebook to what happened back in 1998-2000 plus all the regulations that changed granting stock options.

thomas.wong1986 says

You cannot compare what happened with 1-2 comapnies like google or facebook to what happened back in 1998-2000 plus all the regulations that changed granting stock options.

Sure we can. The people who cashed out in 1998-2000 ARE STILL THERE.

All this AAPL, GOOG, FB, Zynga BS is just added demand, demand from a market that stopped making new lots about 40 years ago.

The price level in Los Altos has been flat for 7 years running. I think demand is still insane-- I have a dotcom millionaire friend priced out of the area.

05/30/2011 Pending sale $1,700,000
05/06/2011 Listed for sale

08/28/2011 Listing removed $1,449,000
08/20/2011 Listed for sale

12/09/2011 Sold $2,020,000
08/30/2011 Listed for sale

09/20/2011 Pending sale $1,598,000
09/06/2011 Listed for sale

05/01/2011 Listing removed $2,300,000
04/14/2011 Listed for sale

03/29/2011 Listing removed $2,298,000
02/26/2011 Listed for sale

This is just recent sales on a random block of Los Altos that I'm familiar with.

Bellingham Bill says

AAPL

Apple grants a dinky amount. Jobs was not a generous person. You forget how much he saw money/wealth as evil.

2009 234,000
2010 34,000
2011 1,000

Hardly much to talk about see page 68
http://investor.apple.com/secfiling.cfm?filingID=1193125-11-282113&CIK=320193

Google's ISO were exhausted long ago now and new employees only get RSO. So forget that..hasnt stopped prices from falling.

compare anyone you listed to Ariba in 1999 ... wake me up when it spits 2x pre public and shots over 800 a share and splits ... and back up over 800..

http://www.google.com/finance?q=NASDAQ%3Aarba#

Ariba employees ? long long gone! far far away from the Bay Area.

Zynga ? $12/share.. are you expecting it to fly to over $800/share ?

thomas.wong1986 says

Apple grants a dinky amount. Jobs was not a generous person. You forget how much he saw money/wealth as evil.
2009 234,000
2010 34,000
2011 1,000
Hardly much to talk about see page 68

Dinky, heck no

That is ISO, Silicon Valley transitioned to RSU long time ago especially as companies flip from loss to income.

2008 = 7.8M @$111 = 865M
2009 = 6.2M @$214 = 1.3B
2010 = 6.7M @ $312 = 2.1B

Based on today's market value of $450 those 20.7M shares granted the last three years are worth 9.3B, there's plenty of new millionaires on the Apple pipeline as well. Of course, RSU's are not as lucrative as ISO's when the stock appreciated like it did.

It doesn't seem much compared to Facebook only because Facebook became a forty bagger while Apple was about 5 or six the last four years. Apple will never become a forty bagger anymore so stock option while lucrative will not get you rich. RSU's are guaranteed payout with appreciation upside.

What you think is dinky is mere transition of the Corporation's compensation structure. An estimated 100B are already excercised.

Facebook has a viable business model. Sure, it may eventually go the way of a dodo bird like Kodak, but it's stupid to argue that advertisers haven't benefited from Facebook. Advertising is a numbers game of getting people expose to the message, if enough people see it eventually you'll have an increase in your average business.

That is after all how barbie became popular in America. For the record, I have advertised on Facebook and Google. If you are reading this...join my peition.

www.facebook.com/1337cats

thomas.wong1986 says

Kevin says

Anyway, facebook isn't really being that overpriced when compared to other stupidly priced companies; they'll be at about 95 P / E, vs. Amazon at 130.

When we had a real tech boom in the 90s the returns were around 10-15% annually on the S&P with PE at 30. Anything over 50 was considered insane... and so is your 95 today.

The vast majority of IPOs were rationally priced and had to earn any increase in prices based on actually earnings not some pie in the sky story. High PE multiples cause a lot of problems and distractions for companies and employees we all rather not have.

95 *is* insane, just like the 90+ that you saw in 2000, and the 130 amazon is enjoying.

Just because it's priced stupidly doesn't mean that people who have the stock right now won't get rich off of it.

Kevin says

95 *is* insane, just like the 90+ that you saw in 2000, and the 130 amazon is enjoying.
Just because it's priced stupidly doesn't mean that people who have the stock right now won't get rich off of it.

You may have just lost your moral compass...

So your perfectly ok with investors lossing their shirt so a few FB employees and realtors benefit..And somehow FB employees will feel they earned it based on hype.

What happens when real tech companies, the bread and butter of Silicon Valley need to go the capital markets. If investors get burned badly with FB, they aint coming back here again. They lost confidence in "real" technology industries.

Warren Buffet understood all this.. thats why he called it "Wealth Transfer on massive scale"... and not wealth creation which is what we had decades before.

Advertisers look at what they get for their advertising. No longer will people simply toss money at an ad because someone says they'll make money. They want proof and the proof is in the numbers. With internet advertising you can see who is coming, who they're referring, what they're doing, how much time they're spending and if they're buying (or making you money in any way). Facebook is failing here, it's like groupon, people are realizing it's very hard to get those users to do anything once they've paid for them.

Not touching this with a 10-foot pole.

I *understand* that there are millions of adolescents of all ages, who want to attention whore their every movement.

However I just don't see it as productive nor trivially monetized.

Uh, I never claimed that it's "OK" for this stupidity to occur, only that it will.

People who are able to get in on the IPO are going to make out like bandits, fooling stupid pension funds into handing over their money.

That's just how these things go.

chanakya4773 says

FB can only do that by increasing its current monetization by 5 times on the same user base. can it do that ?

FB will have to hire a bunch of slimy and highly experienced 40-50 year old Madison Avenue ad guys.. there aint no 25 or 30 year old engineer who can answer that question...

But then how is it that Facebook has a 40% profit margin and billions in cash? They must be doing something right with advertising.

40% (gross) margins are actually fairly low in first-party advertising. Take a look at the filings from google, or even yahoo -- gross margins are much better there (upwards of 80%)

Facebook's net margin is lower than Google's, but better than Yahoo's.

What's the difference between gross margin and net margin for a web company?

Gross margin is income minus "cost of sales" whatever that is.

Net margin is income minus all expenses, right?

Web companies cost of sales usually includes "traffic acquisition costs". In the case of something like Google's adsense, this is the amount paid to publishers. It also can include things like revenue sharing arrangements.

For instance, there's a revenue sharing arrangement between microsoft and facebook on ads shown in search.

Facebook also only gets a 30% gross margin on facebook credits AFAIK.

I still don't quite get why there are two separate margins.

There's revenue, and there's expenses. So I would think there should just be revenue - expenses = margin

Gross Margin is typcially thought of as:

Revenue / Cost of Goods Sold or Cost of Revenue. It's the direct cost of attaining the revenue. Any business can generate revenue if they give it out for free or essentially free, but it only matters if the revenue has some profit or margin in it.

Revenue / total expense (revnue - COR - SG&A)is the operating margin. Include non-operating item like interest and extraordinany items and it is thought of as profit margin. Most people consider these SG&A (selling, general and Admin) expense or simply overhead. Overhead is mostly thought of as the fixed cost of doing business. Fixed doesn't mean fixed, when a company annouces layoff or hiring plan, It just a part of the company's plans to increase SG&A or reduce SG&A base on the needs of the business. Facebooks's SG&A expanded significanly betweem 2009-2011, which also means they have been hiring quikly in proportion.

Profit margin should be clarified to mean before tax or after tax. In 2011, Facebook achieved a profit margin before tax of about 40% and after tax profit margin of 25% Apparently they have not used some of Googles tax strategy's to get Effective tax rate to around 20%. Facebook is at 40% but we know it's going to be a shareholder demand to fix that soon. 40% profit margin before tax is among the top 1% in the S&P 500. The only company I can think of that has has higher profit margin is BIDU.

Having said that, this is GAAP accounting. An obvious flaw to GAAP profit is stock compensation expense for GAAP purpose vs. reality. Stock compensation expense recongized is based on mostly the black-scholes model and in the case of Facebook, the actual result per the model is nowhere close to reality. I believe it is hidden in the APIC.

Gross margin is important because it tells me the profit potential of the company. Let's say Facebook has a revenue of $100 and achieved gross margin of 80% and SG&A of 40%. (to get to 40% profit margin).

The comany has decided to expand SG&A by 10% to support their business. From $40 to $44

They had a great year and sold $200. (monetized their revenue but only need to expand SG&A by a little)

Gross Margin @ 80% = $160
SG&A 44
Profit Margin = 116 or 58%

Based on this oversimplistic model, doubling their revenue increased their profit margin from 40% to 58% or before tax profit from $40 to $116. A great gross margin leverages each additional dollar to the bottom line. To the extent that Facebook can monetize more revenue, it will be hit profits exponentially. That's what get the financial analyst people excited and support these crazy PE's. Google for the longest time was prices at 100 PE which was supported by fast growing sales flowing to the bottom line and actual cash even faster.

Which loops back to BIDU because it is a great example of the power of gross margins. BIDU had a PE of 500 when it first traded for around $10. Because they had excellent gross margin, that 500 PE ultimately became a ten bagger winner as well. The secret is they were able to monetize achived revenue into essentially all profits. Profit margin went from 25%, 35% 40% and now 50%! They can get to 60%. If you tell me that BIDU was going to be a 50% profit margin in 2008 (and kick Google's ass in China), I would pay 1000 PE easily.

To most, Facebook will appear expensive, but 100 PE can be a bargain if you can visualize this as a 75% growth business with 60% incremental profit margin. Facebook has that potential. Some of the largest private equity buyer who invest hundred of millions see it that way as well. It's 100B for a reason.

I still don't quite get why there are two separate margins.

There's revenue, and there's expenses. So I would think there should just be revenue - expenses = margin

The difference between gross and net margin is a reflection of a company's ability to contain costs. It's much more useful in manufacturing and other industries than it is in industries like software or advertising, where the only real expense is labor.

For many industries, you might as well think of "gross profit" as "revenue".

SFace says

Which loops back to BIDU because it is a great example of the power of gross margins. BIDU had a PE of 500 when it first traded for around $10. Because they had excellent gross margin, that 500 PE ultimately became a ten bagger winner as well. The secret is they were able to monetize achived revenue into essentially all profits. Profit margin went from 25%, 35% 40% and now 50%! They can get to 60%. If you tell me that BIDU was going to be a 50% profit margin in 2008 (and kick Google's ass in China), I would pay 1000 PE easily

You could equally have used Ariba, Commerce One, Agile, Priceline, VerticleNet or the other over-priced stock. They too had the same argument, but it all failed at the end.

If what you said was true, then why didnt we ever .. and I stress the work EVER see, prior IPOs going out at a higher valuation prior to 1995 and Netscape. Since 1995, pretty much nearly 99.99% of the IPOs have tanked. You mention, BIDU and Google.. yet there are countless others that failed badly.

When Cisco went public its valuation was modest and had to earn any stock appreciation based on performance. Its is a complete rip-off to over pay based on some pie in the sky forecast of higher future earnings. THAT WAS THE LESSON we learned from the DOT.COM bust.

thomas,

that person identifies HimSelf with the American Express Black card. You wanna spend your calories arguing with someone like that?

Jeez.

B.A.C.A.H. says

You wanna spend your calories arguing with someone like that?

Arguing burns calories? I need to argue more. It's the most fun exercise I get!

B.A.C.A.H. says

thomas,
that person identifies HimSelf with the American Express Black card. You wanna spend your calories arguing with someone like that?
Jeez.

they wont last long... they never do.

Based on Thomas' logic, Facebook would be massively overpriced when Microsoft valued them @ 15B on a private transaction three years ago. Clearly that is wrong.

High PE can be supported if the profit margin are high and sales are rising. That is the essense of a money generator and the only reason I see Facebook as a worthwhile investment. This has nothing to do with Ariba and Commerce One, or dot com. 99.9% fail rate is not tehnically not correct anyway.

Besides Goog and Bidu, there are plenty of companies that grow into their high PE's on IPO's post 2002 including NFLX, Salesforce, Chipotle, and Lululemon. Obviously, if your reference point is year 2000 and high PE then I get that excess.

The centurian is a tribute to my two mentors, one my boss and one my F-inlaw. That should not offend you. On the other hand, It totally respect your viewpoint as well. I only care about adding value to these message board based on my perspective.

I just read that 12% of facebook income comes from Zygna. That is impressive, they must have dumped a lot of money into facebook over the years.

SFace says

Based on Thomas' logic, Facebook would be massively overpriced when Microsoft valued them @ 15B on a private transaction three years ago. Clearly that is wrong.

That is why im saying FB is overvalued.. The logic was very sound on the part of MSFT.. you may not know what to do with something like FB, but you dont want the competition to get them either. So you inflate it beyond any possible way for FB to get acquired. Its a poison pill designed to backrupt the acquirer.

$300M for say 1.6% share in FB isnt much a material amount for Microsoft to actually lose. They sneeze more that each day.

Now that there is a exit, that investment for everyone else who pitched in has to have a big return.. but its already inflated thanks to MSFT.
And there will be blood...

SFace says

including NFLX, Salesforce, Chipotle, and Lululemon

They came out in dinky valuations.. Sales force went out at 15 and dropped to 11 before reaching 125+ many years later. Same with Netflix..
they were only a mail based DVD rental lighly valued before growint.. there was no way to spin/inflate this business..

The advantage facebook has right now is that it can find new ways of creating revenue. It's like google back in 2000. They came up with a model that made them boat loads of cash. However, over the years, they've figured out how to create reallly big boatloads of cash out of it.

Facebook right now is making money, but the potential there is massive. However, as it stands right now, advertisers are getting very little bang for the buck. The thing with Internet advertising is that you can get exact numbers. Newsprint you can claim for every person who brings in a coupon, 50 others forgot it at home. Who really knows? It's easy to fudge those numbers. Advertising online is far different. It's possible to see exact impacts to your numbers, visitors, how much traction you get, how often they return, etc. Facebook is doing a horrible job in all of those metrics.