By Doug Kass - 05/22/12 - 12:00 PM EDTReal Money) -- Last night on "Fast Money" with Melissa Lee and the gang, we discussed -- what else? -- Facebook
"This is a historic moment in which new media has truly come of age." -- Steve Case, January 2000
"The Internet had begun to create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression." -- Gerald Levin, January 2000I likened the publicity and hype that led up to the Facebook IPO to the hoopla surrounding the merger of AOL
- Philosophy: The company is run by a 28-year-old who favors a social mission above profits.
Business trends: The rate of revenue growth is decelerating -- the latest quarter experienced 45% growth in sales, down from 55% growth in the prior quarter. Advertising, in particular, is slowing, with a 37% growth rate in the first quarter. Google's
display ad business (which competes directly with Facebook) is growing faster than Facebook.
- Profitability: Facebook's 50%-plus operating margin seems vulnerable. With nearly 1 billion current users, the low-hanging fruit -- and I am being somewhat facetious -- might have already been picked. I suspect the next 1 billion users will be less profitable to Facebook.
- Financial: Facebook is cash flow negative now as the company spends to grow (on data centers, more employees, etc.).
Valuation: Let's suppose Facebook's revenue growth accelerates modestly to 50% and that operating margins are sustainable. In this example, Facebook will achieve almost $5.5 billion in sales in 2012 and $8.25 billion in sales in 2013; EPS will be $0.60 in 2012 and $0.95 in 2013. At the offering price of $38 a share, these are high multiples, both absolutely and relative to other leading tech companies such as Apple
and Google (at 10x to 11x).
The Disappointing Facebook IPO's Impact on Retail InvestorsMelissa Lee inquired how the IPO will impact retail investors. Retail fund flows continue to be moving toward the safe haven of bonds and away from stocks. In the latest period ending Wednesday, $10 billion was redeemed from domestic equity funds, and $12 billion flowed into bonds. This continues a steady, multiyear outflow out of stock funds that commenced way back in 2007. The timing couldn't be worse as it relates to the retail investor. At best, my expectation that the reallocation rally (selling bonds and buying stocks) will immediately commence in the summer months ahead must be scuttled. At worst, the Facebook IPO (and the recent market swoon) will add more strikes to the hearts of individual investors, keeping them away from stocks over the balance of the year. (Retail investors have already endured two large drawdowns in stocks since 2000, a lost decade of investment performance, a flash crash, stagnating incomes while the necessities of life increase in cost.) Josh Brown, who deals with scores of individual investors in his capacity as a money manager, underscored my view that the Facebook IPO was another blow to the individual investor community.
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