1 of the Craziest Facebook Numbers I Know

Years ago, when Bill Gates was still CEO of Microsoft (Nasdaq: MSFT  ) , he described a simple principle he used to manage the company's balance sheet.

"I came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year's worth of payroll even if we didn't get any payments coming in," he said. "I've been almost true to that the whole time."

Facebook (Nasdaq: FB  ) is taking this philosophy to a whole new level. The company raised $6.4 billion of cash after going public on Friday. Regulatory filings detailing its pro forma balance sheet shows Facebook now has $10.3 billion of total cash and cash equivalents.

How does that stack up against Gates' principle?

Accounting varies between companies, so it's hard to get an apples-to-apples comparison. But here goes: Facebook had total selling, general, and administrative expenses (SG&A) of $835 million in the 12 months ended March 31. With $10.3 billion of cash, that would pay its overhead expenses at headquarters for more than 12 years without a dime of revenue.

Bill Gates, you look like a gambling man!

Even compared with Apple (Nasdaq: AAPL  ) -- known for its ludicrously large cash hoard -- Facebook is still the new king of cash. And its cash in relative terms trounces other tech giants like Google (Nasdaq: GOOG  ) , Cisco (Nasdaq: CSCO  ) , and Microsoft:

Source: S&P Capital IQ.

Now, if we're really talking about overhead costs here, it might be appropriate to add in part of cost of goods sold. For Facebook that includes the salaries of workers at operating segments like server farms. Including these expenses would drop the company's how-many-years-can-you-last-without-revenue metric to something like eight years (it would also drop the figures for the other companies shown in the chart).

Either way, the numbers are huge. Facebook has more cash than it knows what to do with.

In fact, it virtually admits as much in its IPO prospectus. Here's what the company says about its new cash hoard (emphasis added):

We intend to use the net proceeds to us from our initial public offering for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds planned. We may use a portion of the net proceeds to us to satisfy a portion of the anticipated tax withholding and remittance obligations related to the initial settlement of our outstanding RSUs. Additionally, we may use a portion of the proceeds to us for acquisitions of complementary businesses, technologies, or other assets. However, we have no commitments to use the proceeds from this offering for any such acquisitions or investments at this time.

Facebook's acquisition of Instagram shows that it's hungry, willing, and able to make big purchases. Maybe that hunger will continue, and its cash will be used up quickly. Other analysts have spun out all kinds of ideas for what the company can do with its cash -- from ramping up on mobile ads to hiring new talent.

But it looks likely that Facebook will be yet another tech company with a bank account the size of many small nations. With interest rates stuck below the rate of inflation, that's nothing to be excited about. Nor is it necessary -- we're well past Gates' principle of conservatism.

And Facebook's cash hoard didn't come about from years of accumulated earnings, as Apple's has. Most of it came from Friday's IPO, after investors fought tooth and nail for a chance to buy what is objectively one of the most expensive large-cap companies in the world.

Think of it that way and the size of Facebook's cash hoard is simply a reflection of the hype and excitement over its future. The larger it is, the greater the hype is.

And, boy, is it large. And despite all the hoopla surrounding Facebook -- like its cash hoard -- our senior technology analyst thinks he's identified the true winner among social networking stocks, which he details in the Fool's newest research report. To find out which stock looks like a real rule breaker in the massive growth market, click here to grab your copy today.

Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Google, Cisco Systems, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google; and creating bull call spread positions in Apple and Microsoft. 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.


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  • Report this Comment On May 27, 2012, at 3:42 PM, ghenry232 wrote:

    So from my reading of this article, it simply reinforces that facebook is currently flush with money - and that that money is burning a hole through their pocket (instagram). They're taking investors' money, and using it to make big-ticket purchases... and the reason why the ratio of cash on hand to expenditures is so high for facebook is as you say a result of the largesse and/or greed of the investment community, and not based on an operational track record of success.

    With this sort of internal cash pump 'n dump (pump the investment community for cash, dump it in large gaudy acquisitions) I think you'd be a damn fool to forget that Facebook is standing in the footsteps and on the gravestones of MySpace, Friendster, etc.

    Facebook was IPO'd already grossly overvalued. For some reason (excess capital? low rates?) folks up top are still buying into it... perhaps because they know the gov't is paying Facebook handsomely for access to subscriber data? That's the only reason I could see justifying a P/E even approaching their ridiculous and unsustainable level (isn't it something like a P/E of 100? I mean, if you honestly want to bet that the gov't situation is going to stabilize to subsidize a social media monopoly in FB for the next hundred years, you're a f*cking idiot, not a fool). And if not gov't money, then they must be selling that info - and honestly, that could easily drive competitors into business against them... e.g. a service that lets you choose either (A) privacy with ads, or (B) no privacy, or (C) privacy with cash money payment.

  • Report this Comment On June 01, 2012, at 2:48 PM, BigAl1825 wrote:

    Sounds like Facebook will soon deworsify. What else is left for them?

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