Psst! What if Facebook Is Actually Cheap?

Underwriters raised the price range of Facebook's IPO last night.


Instead of the earlier deal that valued the leading social networking website operator between $77 billion and $96 billion, buyers will be shelling out between $34 to $38 for every share of Facebook they covet. If it prices at the high end, which is more than likely at this point, we're looking at a $104 billion company before ordinary investors like you and me get a crack at it in the open market on Friday.

Let me tell you how nearly every analyst and financial media watcher expects this to play out.

Facebook will price at $38 on Thursday night, and possibly closer to $40 or $42. Despite going public at a market cap well above $100 billion, the stock will pop higher for the first wave of public buyers shortly after Friday's opening bell. Whether it hits $50 or $60 -- anything short of the low $70s where it bumps up against the substantially larger Google's (Nasdaq: GOOG  ) market cap seems plausible -- the stock will burn nearly every poor sap that places a market order on Friday.

In a few weeks or perhaps months, Facebook will give back all of those gains. It will be a busted IPO, and the subsequent sell-off in overvalued dot-coms will leave financial historians calling this the Facebook bubble.

Click the "Rec This" button at the top of this article if you agree.

Ha -- made you click
I tricked you. I'm sorry. The rest of this article is devoted to the reasons why the prevailing mindset I just detailed will be wrong. And, unlike Facebook, there apparently isn't a way to "UnRec" our "Rec This" button.

Don't hate me. Just take this time to be a contrarian, unlike the boatload of Facebook IPO bashers that believe that they are the ones being contrarian. They're not. Well, at least not this time.

It's easy to predict that Facebook will pop higher at the open. It's even easier to predict that Facebook will be a busted IPO this summer. We've had plenty of leading Internet companies go public over the past year, only to come crashing down.

  IPO High 5/14/12
Groupon (Nasdaq: GRPN  ) $20 $31.14 $11.74
Zynga (Nasdaq: ZNGA  ) $10 $15.91 $7.95
Pandora (NYSE: P  ) $16 $26.00 $9.82

Source: Yahoo! Finance.

All three companies are the top dogs in their respective areas of specialty. Groupon and Zynga can even tie their rapid success to the popularity of Facebook. Groupon became popular through the viral nature of folks posting the local deals they scored on Facebook (because Groupon promises the deal is free if the person can get three more to follow suit). Zynga's social games took advantage of Facebook opening its door for third-party apps, and now accounts for 15% of Facebook's revenue.

However, none of those companies are Facebook. Groupon and Pandora are just now breaking into spotty profitability. Zynga is merely the trendy store in the world's busiest mall. Given the fickle nature of social gaming, the smarter bet is on the mall landlord itself -- and that's Facebook.

Tomorrow's earnings won't come from yesterday's ads
A common knock on Facebook is that online advertising doesn't work on the site. Facebook may now have more than 900 million active users, but only a handful of them are stupid enough to click on the shady ads promising snoring cures or killer abs.

Search marketing manager WordStream pitted Facebook against Google, finding that just 0.051% of Facebook ads received clicks for advertisers. Google, on the other hand, checked in with a 0.4% click-through rate.

This isn't a surprise. Folks are on Google because they want to go somewhere else. The search engine fails if you're on the site for more than a few page views. Facebook users can be on the site for hours at a time. In other words, Facebook advertising is more along the lines of television consumption. Google is a phone book.

Do you think that things will always be that way?

A Nielsen "State of the Media" report late last year revealed that Facebook users are 12% more likely to shop online than folks who don't participate in social networking website. That makes sense. Folks who trust sharing personal information with acquaintances have an easier time trusting online merchants.

Facebook generated an operating profit of $1.7 billion on $3.7 billion in revenue last year, and that's with crummy ads. What happens when Facebook actually breaks a sweat and tries to monetize its traffic effectively?

I've only clicked on one Facebook ad over the past few years, as far as I can recall. A local restaurant that I had never heard of was opening a Rodizio-style restaurant for pizza. I was intrigued. I clicked. As more local advertisers flock to Facebook -- and ads become less about improving credit scores and more about things around me that jibe with my interests -- just imagine how meaty Facebook's growth will be?

Selling Facebook short
Don't underestimate the power of 901 million users, with more than half of them checking the site daily. Don't sell short the 3.2 billion comments and likes that Facebook collects daily. Do you really think this is a fad?

Educated analysts and seasoned investors will laugh at the unsophisticated noobs giddily paying $57.85 for a share of Facebook later this week. They laugh because they know how to value a company's past, and using that base to discount the future. However, the simpleton getting a market order filled on Friday afternoon may be just as good at nailing where Facebook's model will be in the future as the skeptics. Since there has never been a site as popular and sticky as Facebook, assumptions are dangerous on both ends of the euphoria spectrum.

Keep that in mind when Facebook emerges -- in years if not months -- with the last laugh.

A world of opportunity
Facebook has taken the world by storm, but a new report reveals three more American companies ready to dominate the world. It's a free read, so what are you waiting for? Check it out now.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (10) | Recommend This Article (144)

Comments from our Foolish Readers

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  • Report this Comment On May 15, 2012, at 1:44 PM, accelerando wrote:

    The problem with facebook is that it not only is a fad, it is already a fad of the past. Young adolescents are still hugely addicted to it but older teenagers with any sophistication are ALREADY somewhere else. Facebooks's heyday is in the past. It has lost it's cool and in the business Facebook is in, cool is absolutely everything.

    The more intrusive the ads, the more the cool meisters are out of here to somewhere without ads. And the desertion of the cool-meisters has led, in the past, to the total collapse of seemingly impregnable social sites (aol -- yahoo -- myspace)

    And don't underestimate the privacy issue. It is already starting to bite facebook as the more sophisticated kids begin to realize exactly who now owns all their most important information. Peer-to-peer social networks where your information is safely locked away on your own personal device are the future. Facebook is already the past -- they should have gone public a year ago. Now it is very much too late.

    Prediction. Closes Friday at $50. Rises to $75 by July 1. After flat 2nd quarter earnings and revenues stock drops into the 30's. A year later, with earnings and revenues in steep decline FB sells for under $1/share.

  • Report this Comment On May 15, 2012, at 2:39 PM, TMFNewCow wrote:

    I still don't have killer abs, no matter how many times I click through.

    -- Evan

  • Report this Comment On May 15, 2012, at 3:24 PM, FoolishLonghorn wrote:

    Like much of the analysis here at, this one lacks fails to account for value.

    Is $100 billion a fair price for a company that generated $1.7 billion in profit, and pays no dividend?

    How will this company grow? More users? The opportunities for growth are limited by the population. Since most internet users in the US already have a facebook account, it would seem that most growth will have to come from outside of the US.

    More profit per user? Perhaps, but how much are advertisers going to pay? According to Rick, facebook is not really trying yet. But I am already annoyed by the ads on Facebook. Make it much more intrusive, and my use will drop.

    Facebook is a good company, and I do think they will continue to grow. A good buy at $100 billion, probably not.

  • Report this Comment On May 15, 2012, at 3:30 PM, TMFAleph1 wrote:

    <<However, the simpleton getting a market order filled on Friday afternoon may be just as good at nailing where Facebook's model will be in the future as the skeptics. Since there has never been a site as popular and sticky as Facebook, assumptions are dangerous on both ends of the euphoria spectrum.>>


    You're right that there is no certainty, but that's entirely the point. The IPO prices being discussed -- let alone the price in the secondary market -- assume that tremendous success is assured.

  • Report this Comment On May 15, 2012, at 3:52 PM, CaptainFiveBaggr wrote:

    people who say facebook is a fad are completely out of touch with the direction of the company. Where the stock will land today or a year from now is literally a wild guess. Anyone who tells you otherwise in a serious manner should be institionalized... The fact that it grew by $12B in a few days before IPO goes to show that not even the highly commissioned bankers behind the model have how to value it.

    But that aside, anyone buying facebook stock should buy it for the belief that it is a technology company, not a social network. You are buying mark zuckerberg, his brain trust, his brand value, and loyal followers... not some website that lets users interact. It's their platform today, much like "search" was Google's platform 10 years ago. They will have their own version of cloud services, mobile phones, operating systems, analytics, email, etc... just like Microsoft, Apple, Google, and the other monsters of tech has. It will take them time and who knows where the stock will go now and in the near future, but "facebook" the company is so far from a "fad" its not even fair to suggest that.

    I'm taking the plunge for a few shares, but not because I know what's going to happen. If it pops off 30-50% in 2 weeks great. If it bombs 70% in a year thats fine too.. I'll re-load 10x over and stockpile cash while others doubt technology.

    I also have to say I disagree with the comparison of GRPN, ZNGA, & P... those are all nitch players with limited upside. Facebook really doesn't have a peer yet, so it could be in the same cateogory as AMZN, LNKD, MSFT, GOOG, etc... albeit with a lot to prove before it can be considered in that company it's the only reasonable comparison.

  • Report this Comment On May 15, 2012, at 6:45 PM, Realexpectations wrote:

    I rec it because

    I liked it (thumbs up)

    not because of your first half



  • Report this Comment On May 15, 2012, at 6:52 PM, Realexpectations wrote:

    I do kinda agree its a fad but not exactly going away.

    Looking at start of college 5 years ago and same students around me today

    We we all on facebook 24/7.

    We could have taught facebook 101 we joked


    those same people including myself, go on probably once a month

    but my girlfriend still goes on almost everyday

    maybe thats bc shes a chick

    i have no idea

  • Report this Comment On May 15, 2012, at 7:01 PM, TheDumbMoney2 wrote:

    I don't think it's a fad. But priced at $100 billion, it's just too speclative, at least until I see better monetization of the ads. Until then, both the dumbells and geniuses are speculating. If they get lucky, they'll get called smart. If they get unlucky, they'll get called dumb. Nobody knows the answer on this one.

    As for me, I have no need to be called smart. If FB is "all that," I'll happily forgo a lot of the speculative risk, and pay up later at a higher price, or for the dividend stream years from now when it's no longer a major growth story, or perceived as such, and the excitement has moved on.

  • Report this Comment On May 16, 2012, at 8:14 AM, pondee619 wrote:

    What is the value to an advertiser of an ad that no one "clicks" on? "just 0.051% of Facebook ads received clicks for advertisers"

    "Facebook advertising is more along the lines of television consumption. Google is a phone book" Facebook is more like bill boards on the highway without the cleverness of Burma shave.

    How many clicks do your advertisers get on the ads that litter these pages?

  • Report this Comment On September 27, 2012, at 9:33 PM, rlcato wrote:

    I clicked thru and dated a chick with enormous knockers! Boy, she's a looker!

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