5 Smart Things Facebook Can Do With Its Cash

It's been nearly two weeks since Facebook (Nasdaq: FB  ) began trading publicly, and the steam can still be seen coming out of Main Street investors' ears regarding the company's -- and its stock's -- precipitous fall from grace.

At some point in the near future, investors will forget all about Nasdaq OMX's technical foul-ups in placing buy and sell orders, the fact that lead underwriter Morgan Stanley (NYSE: MS  ) lowered earnings estimates on the company just a day before it went public, and CEO Mark Zuckerberg's frantic attempts to increase the offering price at the behest of the underwriters, despite what is now perceived as a misunderstanding of actual demand.

When that happens (keep holding your breath), investors will actually have to get out their pen and paper and put a logical valuation on Facebook -- not one influenced by anger, love, or any other sentiment, but rather a logical evaluation of the company.

Today, I want to examine further one aspect that will be taken into account when investors do get around to properly valuing Facebook: its cash balance.

My Foolish colleague Morgan Housel already touched on Facebook's huge cash load last week when he examined the incredible amount of time Facebook could reasonably go without receiving a payment and still keep its operations running. Based on the $6.76 billion raised during its IPO and the $3.9 billion already on its book beforehand, Facebook could last, according to Morgan's findings, roughly eight years without any payments from its customers. That's a stunning figure that's double what its social-media peer Google (Nasdaq: GOOG  ) can boast.

With a current cash balance of roughly $10.7 billion, the question has to be asked: "What is Facebook going to do with all of that cash?"

The company doesn't even know as of now, as it outlined in its IPO prospects: "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."

As for me, I have a few ideas for Mr. Zuckerberg.

1. Buy its way into China
If you haven't heard by now, there's this little country called China that has more than 1.3 billion people and is expecting to grow its GDP by 7.5% this year. As of December 2011, China accounts for 513 million of the 2.27 billion worldwide Internet users -- that's 23%! As U.S. and European markets grow saturated and growth tapers, Facebook is going to need to find ways to grow its business and get more page views. Plain and simple, China is it!

There's just one small problem: China's strict Internet laws would keep a company like Facebook out of the fold. It's the same reason Google isn't dominating the search engine market in China. So, to me, it would make a lot of sense for Facebook to consider using its cash to acquire a China-based social site or a media outlet that could roll out a social site in a fashion similar to how Google rolled out Google+. No, this isn't an endorsement for Renren, but it could mean that SINA (Nasdaq: SINA  ) -- which has both mobile and Internet applications, and whose portal Weibo is set up as a trendy micro-blogging platform -- could prove a perfect entry for Facebook into the Chinese market.

2. Focus on mobile, mobile, and more mobile
Out of all the arguments as to why you shouldn't buy Facebook's stock, the one that makes the most sense is that it's giving away revenue opportunities each and every day on the mobile front. Facebook has 901 million users, of which 425 million access the social site by mobile device each month. Not a single one of these users is seeing ads -- a gigantic missed opportunity by a company that relied on advertising to produce 82% of its revenue last month.

We are beginning to see Facebook take notice, and it has taken the first steps to remedy this situation in the past few weeks. The first step was the purchase of photograph-sharing company Instagram for $1 billion. Instagram might seem ludicrously valued to many, but it was the fastest-growing mobile app in April, according to ComScore, with 14.6 million unique users, up from just 8.2 million in March. Its jump onto Android phones is the primary reason for those gains. Facebook has also made notable purchases since then of Glancee, a location-sharing mobile app, and LightBox, an Android OS rival to Instagram.

This is a good start, but I'm expecting much, much more!

3. Go digital
Facebook is making frequent small purchases of late. But last year's purchase of Push Pop Press, a start-up digital bookmaking service by former Apple employees, intrigued me.

Both Apple and Push Pop Press noted that Facebook has no intentions of infiltrating the book business anytime soon, and that Push Pop Press' intellectual property is what made it an attractive purchase. I, however, think it would be a genius move if Facebook moved into the social e-book platform. Facebook's main rival, Google, currently provides its users with an eBookstore, so it would be only natural for Facebook to offer its own digital book platform.

In addition, a digital bookmaking platform would allow lesser-known authors -- and much of its user base -- an easier way to transfer content across its media platform. What, do you actually think Barnes & Noble has a clue what it's doing with the Nook? Facebook has a huge opportunity to expand its content reach, and digitizing book content could be a smart move for the company.

4. Find a good lawyer
If Apple (Nasdaq: AAPL  ) has taught us anything, it's that being the biggest simply means a larger bull's-eye on your back.

Apple, the most sued tech company in the world, has seemingly defended itself against everyone but the kitchen sink. The U.S. government, Eastman Kodak, Motorola Mobility Solutions, and Nokia are just a small sampling of the plaintiffs that have sued Apple. Apple has, in turn, sued five very large tech companies since 2008.

Facebook needs to learn from Apple and understand that it's going to be the target of every business, big and small, that feels it has had its intellectual-property portfolio stomped on by Facebook. For starters, it needs to prepare for the lawsuits that will continue to stream in from its botched IPO. We often forget about the ramifications of legal expenses, but Apple provides a good reminder that they're an important part of protecting your patents and your image.

5. Pay its shareholders a dividend
Last, but certainly not least, Facebook should consider paying its shareholders a dividend! I know, I know -- Facebook just went public, and if it wants to stay ahead of its competition, it will need to expand its existing infrastructure and make key acquisitions. Well guess what? I agree!

However, I also understand that Facebook wouldn't exist without the 901 million active users that draw ads and business opportunities to its site. Adding a dividend would also be a sincere gesture that shows Facebook cares about the interests of its shareholders, which isn't a bad idea, considering that its IPO was a flop and that Zuckerberg has a lion's share (57%) of the voting interest. If shareholders felt they were getting something in return, a lot of the doubt over Zuckerberg's ability to run a mega-cap company would probably dissipate.

What do you feel is the most prudent thing for Facebook to do with its cash? Tell me and your fellow Fools about it in the comments section below.

If you've OD'ed on Facebook altogether, then you should check out the company our analysts at Motley Fool Rule Breakers think you should be buying instead. Click here for access to this free special report and unlock the identity of this game-changing stock.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He admits to spending way too much time on Facebook. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Facebook, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Google, SINA, and Apple, as well as writing puts on Barnes & Noble and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (36) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2012, at 2:13 PM, jesterboomer wrote:

    If revenue projections were adjusted without communicating this to main street, FB/Zuckerberg and other insiders could cancel a % of their privately held shares to effectively adjust the current market cap to $38 per share.

    FB, MS, GS, etc. are guilty of hype - what a surprise!

  • Report this Comment On May 31, 2012, at 2:18 PM, Raprox wrote:

    Buy back some stock. At $27 versus the $38 they sold at, that's an almost 30% return in two weeks!!

    :-)

  • Report this Comment On May 31, 2012, at 5:18 PM, IBGriff wrote:

    1 Smart Thing Facebook Can Do With Its Cash: Invest in Google

  • Report this Comment On May 31, 2012, at 5:19 PM, DougJ51 wrote:

    How about giving it back to everyone they lied to and screwed over? I think that would be a good start to show Zuck is not the same greedy back stabbing loser he was in school. Or, is he and this is just another incident of why not to trust him.

  • Report this Comment On May 31, 2012, at 5:23 PM, TrackUltraLong wrote:

    DougJ51,

    Thats one of the main reasons I threw #5 in there: initiate a dividend.

    Not many investors are too trusting of Facebook's current valuation or Zuckerberg's 57% voting share - they feel their voices will get lost in the crowd. A dividend would cure that.

    As for those who lost their shirts buying into the IPO, the underwriters, the media, and Nasdaq are all to blame just as much as Facebook... just my opinion and I'm sticking to it.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 5:24 PM, TrackUltraLong wrote:

    IBGriff,

    Starting an eBookstore would definitely be following in Google's footsteps and I think it would be an incredibly smart move. I doubt they'll invest IN google specifically, but they may use Google as a test model for other avenues with which to create a revenue stream. Jack in the Box did the same thing with McDonald's and now its on solid footing, so there's no reason to believe Facebook wouldn't do something similar.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 5:56 PM, foolshand wrote:

    buy znga

  • Report this Comment On May 31, 2012, at 6:05 PM, xetn wrote:

    They could just send the money to me :)

  • Report this Comment On May 31, 2012, at 6:12 PM, jerminator80 wrote:

    buy netflix :)

  • Report this Comment On May 31, 2012, at 6:18 PM, CER4040 wrote:

    @TMF UL

    I think they did the next best thing by hiring Sandberg from Google as their COO.

    I think all the attacks on FB are overkill. If anything people should be upset with the underwriters. They are the ones who are laughing all the way to the bank.

  • Report this Comment On May 31, 2012, at 6:28 PM, jerminator80 wrote:

    buy netflix.... and introduce subscription based media services to their already 500 million based user base - just a matter of convincing their users to pay 8 bucks a month to watch tv/movies.

  • Report this Comment On May 31, 2012, at 6:31 PM, chopchop0 wrote:

    Start some buybacks to start juicing up those 1st quarter earnings, after what has been an ugly IPO

  • Report this Comment On May 31, 2012, at 6:32 PM, jerminator80 wrote:

    then buy rim. grab all their badass patents and release a phone from a new iteration of their operating systems - thats facebooky and cool and hip.

    heck, be even more clever and release a purely internet enabled phone, where voice and sms is all encapsulated through your facebook account. No more need for cell phone numbers....

    that would be king imho

  • Report this Comment On May 31, 2012, at 6:33 PM, TrackUltraLong wrote:

    Foolshand,

    I considered a purchase of Zynga when I was creating a list of the best ways it could spend its cash, but I felt the development and time costs of creating new games every six months would be far greater than the pittance it would save in payouts to Zynga.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 6:33 PM, TrackUltraLong wrote:

    xetn,

    Like I said... a dividend. I don't think any shareholders would complain.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 6:35 PM, TrackUltraLong wrote:

    jerminator80,

    Buying Netflix is a really really small possibility, but it would give them access into streaming content. I think it'd be better off sticking to a eBook platform instead of a streaming video front, but I wouldn't completely throw the idea out as nuts.. let's just say that.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 6:35 PM, jerminator80 wrote:

    i think they need to do more or they might end up like AOL.

    I mean when you really think about it, AOL was a place where you could chat with your friends, play games, send emails, sort of your portal to the internet.... and facebook is a place where you chat with your friends, play games....

  • Report this Comment On May 31, 2012, at 6:36 PM, TrackUltraLong wrote:

    CER4040,

    I'm going to go old school and pound the table on that one right alongside you. Hiring Sandberg was extremely crucial as that may be the only reason shareholders haven't revolted against Zuckerberg after the stocks dismal debut. She brings maturity and years of experience with her that Zuckerberg simply doesn't have yet.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 6:38 PM, TrackUltraLong wrote:

    chopchop0,

    I thought about Facebook using the money for buybacks as well, but I don't think EPS maximization is their primary target at the moment.... especially given that Zuckerberg was trying at the behest of underwriters to crank up the offering amount. It could be a tool they use a few years down the road, but I wouldn't hold your breath.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 6:40 PM, TrackUltraLong wrote:

    jerminator80,

    But there are big differences between AOL then and Facebook now. AOL was a contained network that didn't exactly connect you to anything beyond your friends or use your personal information well enough to direct ads, games, and other tools at you based on your and your friends likes and preferences.

    Facebook has the privelege of considerably more people online now and it does have those cloud-based advantages working in its favor. That isn't to say it couldn't wind up flopping like AOL did, but the circumstances are much different.

    TMFUltraLong

  • Report this Comment On May 31, 2012, at 8:19 PM, bobpete54 wrote:

    Build and acquire the best social media marketing platform. Current internet advertising is boring and antiquated - banner ads don't work well for brands. IMO GM was simply saying FB needs to raise their game compared to the alternative. Maybe beat Google to the next iteration of search and build or buy a true "social" search engine. Show me what my friends and their circle of friends and my demographic think of (or buy) related to the products I'm searching for. I want an adverstising alternative to Google - that works.

    Hope the FB phone rumors are simply that - rumors..

  • Report this Comment On May 31, 2012, at 8:58 PM, 0ldcheapskate wrote:

    Do the homework. Numbers don't lie. FB shares are only worth $17.45. Give it time and it will get there.

  • Report this Comment On June 01, 2012, at 2:12 AM, esxokm wrote:

    The Netflix idea is an interesting thought experiment. I've been sort of thinking along these lines, but I'll say, simply in a general sense, that Facebook must morph beyond a user base that blogs to friends into a more traditional media company.

    Perhaps buying a movie studio like LGF is closer to what Facebook should do. Maybe trying to start a cable channel, etc. However, I would agree with those who would point out that the stock would probably take a hit if it did any moves such as the ones I just mentioned.

    Above all, though: yes, pay a dividend.

  • Report this Comment On June 01, 2012, at 2:46 AM, lowmaple wrote:

    As you suggested buy into companies that can monetize the mobile since it looks like that could double their ad revenue so their P E would drop by half. So then it's worth 58 as of today's stock price.

  • Report this Comment On June 01, 2012, at 3:17 AM, Charbroil121 wrote:

    Like, I'm as big of a fan of a dividend as anyone, but asking Facebook to pay one seems bizarre. The company's return on investment is staggering; why would shareholders want the cash in their own pockets (where they can earn 7-10% at best) when they can see it invested in growing the value of their Facebook investment at a rate of 20-40% a year?

    Also, Facebook can't buy its way into China--the website is blocked there for political reasons. Short of bribing the Politburo with that $10 billion*, there's literally no way for the company to "buy its way into China."

    With all due respect, this article seems to have been imperfectly researched.

    * This is a joke, by the way.

  • Report this Comment On June 01, 2012, at 8:17 AM, hiddenflem wrote:

    Buy ancestry.com. Imagine the possibilities: friending up deceased ancestors or at least tracking them down and sharing new information with family....identifying common DNA with your friends, or making new friends based on common ancestry. Would open up a world of possibilities.

  • Report this Comment On June 01, 2012, at 11:24 AM, StopPrintinMoney wrote:

    How much of this cash will be left after the lawsuit-related dust settles?

  • Report this Comment On June 01, 2012, at 11:30 AM, thinkdeep wrote:

    And, they could go old school and aim at keeping their direct (and indirect expenses) lower. What do they pay for? Server farms and electricity. Google (with Marubeni) decided to invest in the Atlantic Backbone, the new transmission required to get the juice of east coast offshore wind farms to the market on shore. There is also smart metering, Liquid Metal Battery and other technology solutions to managing the cost of the flow of electrons. And, they could go 21st century finance solutions and micro finance communities that don't yet use facebook to develop their user base.

  • Report this Comment On June 01, 2012, at 11:35 AM, davidcallen wrote:

    FB should get into something like Macro Solve has patented that would allow all FB users to use their smart phones like a cedit or debit card in bars and restarants, etc. whle being able to monitor their balance during the evening out.

  • Report this Comment On June 01, 2012, at 11:36 AM, mikecart1 wrote:

    6) Offer an apology letter to all the shareholders for suckering them into a pipe dream of a company that has very poor revenue - even with almost 1 billion customers. Possibly use it to fund the Facebook Charity which is used to actually provide good for the world that helps find cures to cancer and other diseases, helps the homeless and the poor, and improves the education system of this country so shareholders don't make this same mistake again.

  • Report this Comment On June 01, 2012, at 12:55 PM, TrackUltraLong wrote:

    StopPrintinMoney,

    I don't think the lawsuits will consume very much at all since Facebook is just one company named in the suit. Most of the blame is probably going to be directed at Morgan Stanley and Nasdaq OMX. Still, it would be prudent for Facebook to consider spending some of its cash on a "Johnnie Cochran-esque" legal team.

    TMFUltraLong

  • Report this Comment On June 01, 2012, at 12:57 PM, TrackUltraLong wrote:

    Hiddenflem,

    You know... Ancestry.com isn't a bad idea... I'm just not sure if Facebook's management would see the value and growth in the business. But, I like the idea...

    TMFUltraLong

  • Report this Comment On June 01, 2012, at 12:59 PM, TrackUltraLong wrote:

    Thinkdeep,

    If Facebook isn't already looking for ways to use green energy's and lower their energy usage and expensing, then someone should slap them upside the head. I'm inclined to believe they're doing their part, but I admit, I've never heard Facebook talk about their green energy initiatives one way or another.

    TMFUltraLong

  • Report this Comment On June 01, 2012, at 1:01 PM, TrackUltraLong wrote:

    Davidcallen,

    Basically you're saying they should get into Near-field communications technology. NFC is the next-generation in payments, but I'm not quite sure it fits with Facebook's grand scheme. It'd be like MasterCard buying a cloud-computing company.. it could make lots of money, but it doesn't know the first thing about cloud-computing.

    TMFUltraLong

  • Report this Comment On June 01, 2012, at 1:04 PM, TrackUltraLong wrote:

    Mikecart1,

    That's why I suggest Facebook pay a dividend to demonstrate its committment to its shareholders and exhibit that it's a mature company.

    As for investors, I feel bad, but ultimately, they pulled the buy trigger. Investors should know the risks and rewards before investing.

    TMFUltraLong

  • Report this Comment On June 04, 2012, at 2:14 AM, ockhamsrazor wrote:

    when you pay a zillion times earnings, the *last* think you want is a dividend. that money needs to be spent on capex or M&A or sending management to hogwarts, or something, because you need a miraculously-high, sustained, compounded ROE on every cent the company can lay its hands upon, to generate the kind of growth implicit in the multiple.

    i wish the basefook speculators the best, sincerely, despite my scorn for their process. if lotteries didn't occasionally produce big winners, there would be that much more competition for serious investors, after all.

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