Anxious investors not wanting to wait for Facebook’s public debut, which is expected in the second quarter, are buying up shares of companies that stand to benefit from the social-networking giant's mega-IPO.
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Facebook
Shares of application makers Zynga have rallied 13 percent in 2012 as reports on the timing and size of the IPO began to come out. Beijing-based social network platform Renren is up 50 percent so far this year as investors snap up global social network players. GSV Capital Corp., a major holder of private shares in Facebook, is up more than 20 percent in 2011.
“The app guys benefit hugely if Facebook ever gets serious about making money,” said Michael Pachter of Wedbush Securities. “They need Facebook to give users a reason to register a credit card, then purchases become ‘one-click’ orders. That will make it much easier to spend money.”
Zynga is the country’s largest social game developer with more than 50 million daily active users on Facebook, according to AppData. The company gets most of its revenue by selling so-called virtual goods for games such as “FarmVille,” “CityVille” and “Words with Friends” on Facebook. In turn, Facebook gets 12 percent of its revenue from Zynga, according to the social network’s S-1 filing.
“Zynga leverages Facebook’s 800 million user base to achieve viral distribution of games, which boosts user growth and minimizes sales & marketing costs,” wrote Morgan Stanley’s Scott Devitt in a note to clients last week. He rates Zynga “overweight” with a $14 price target.
Netflix is one of the more interesting derivative plays of the Facebook IPO. The streaming movie service has a Facebook app that allows users to share which movies and TV shows they are watching with their friends, and comment on them. However, it is only available internationally because the U.S. Video Privacy Protection Act, dating from the 1980s, bars companies that rent movies from sharing the viewing habits of users.
Netflix is currently lobbying for the Senate to pass a bill, which the House has already approved, that would amend this law.
“Imagine what this is worth to Netflix and Facebook?” said Jon Najarian, contrubutor on CNBC's "Fast Money" and co-founder of TradeMonster.com. “It would make Facebook a top interface for using Netflix because you could comment on what you’re watching. And it would immediately make Netflix a top 10 application on Facebook in this country.”
Vringo makes a video ringtone app for mobile phones that can be customized to display a montage of Facebook pictures of your friends when they call. A word of caution is warranted, however, as Vringo is a microcap with a price below $2 and a market value of just $12.5 million.
The Facebook integration for Vringo “is a new, more interesting service that doesn’t rely on carrier efforts to grow,” wrote Kris Tuttle, an analyst with the firm Research 2.0, in a note late last year. “If management continues to execute the shares are likely to revisit their IPO level of $4.60 in the coming months.”
Shares of GSV Capital, which invests in privately held growth companies, holds 350,000 Facebook shares at a cost basis of $29.90, according to a note by Ladenburg Thalmann in December. Those shares are worth at least 7 percent more if Facebook is valued at $75 billion. The upside will be even greater if Facebook trades at or above the top of its expected valuation range of $100 billion to $75 billion.
“Key to the attractiveness of GSV as an investment is the portfolio’s narrow focus on the most rapid growth industries in today’s economy,” wrote Ladenburg Thalmann analyst Jon Hickman, who has a “buy” rating on the shares, in that note. “These sectors include social media, cloud computing, clean tech and mobile computing platforms. These sectors all represent multi-billion dollar market opportunities and include some of the today’s fastest growth companies such as Facebook, Twitter and Dropbox.”
Morgan Stanley, the lead underwriter of the IPO, is up 28 percent this year. Landing this deal over other investment banks could re-establish the firm as a destination for technology investment banking, a reputation it held during the Internet surge in the late 1990s.
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Trader disclosure: On Feb 1, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Adami owns C; Adami owns GS; Adami owns MSFT; Adami owns AGU; Adami owns NUE; Adami owns INTC; Adami owns BTU; P. Najarian is long AAPL; P. Najarian is long BAC; P. Najarian is long C; P. Najarian is long JPM; P. Najarian is long WFC; P. Najarian is long MS; P. Najarian is long MSFT; P. Najarian is long QCOM calls; Murphy is long MTW; Murphy is long POT; Murphy is short WHR
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