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Psst! What if Facebook Is Actually Cheap?

Rick Aristotle Munarriz
May 15, 2012

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 o