$75 Billion Valuation for Facebook Justified: Stake Holder
Following the highly anticipated announcement of Facebook’s $5 billion initial public offering, Kevin Landis, Co-Founder & Chief Investment Officer of Firsthand Technology Funds, says he is looking to ramp up the fund’s over $4 million stake in the social networking site as it has exceptional revenue growth potential.
While Facebook’s shares have yet to be assigned a price tag, according to reports the website could be valued at $75-100 billion.
At $75 billion, the company would be valued at around 20 times its 2011 revenue of $3.7 billion, which Landis told CNBC is justified based on its growth potential.
“You hear all these comments that the proposed price is (around) 20 times last year’s revenues – well of course it’s a crazy number - they have only just started to tap that rich vein [access to user information].”
Landis believes that Facebook has a long way to go in terms of capitalizing on its lucrative subscriber base and access to user information.
“Here’s the story – they have a huge number of users of 840 million. They have a huge amount of information about each of these users – willingly offered up. They have only scratched the surface in terms of monetizing that,” he said.
Landis estimates Facebook generated revenue of somewhere between $5 and $10 per user last year, but believes there is still a “huge amount” of upside to come and is therefore looking to buy more facebook shares via the IPO.
“It’s our largest position and we hope to buy some more,”Landis said Thursday. Last month, Firsthand Technology Value Fund, which has net assets of $84 million, announced that it had raised its holding in Facebook to $4.2 million from its initial investment of $1.6 million in October 2011. The Facebook investment makes up 5 percent of the fund’s total holdings.
Commenting on the sort of response the IPO is likely to get, Landis said value investors will certainly “steer clear”, but growth investors who see Facebook as the “next great Internet franchise” will love the story.
David Dietz,President & Chief Investment Strategist, Point View Wealth Management, is one such investor that will not be touching Facebook shares,as he believes they will be highly overpriced.
“History tells you that if you pay too much your risk in the downside far outweighs upside hopes,” Dietz said.
“Look at the closest peers they have, like Google, which is trading 20 times earnings. Facebook is going to be trading around 100 times earnings – so five times more expensive…you really have to ask yourself is it worth paying this,” he added.
Rising competitor and search engine giant Google , the largest Internet listing thus far, was valued at $27 billionafter it went public in 2004. This was around 18.5 times the company’s 2003 revenue of $1.465 billion.
Some of the biggest challenges for Facebook going forward will be whether the company can extensively grow its already large user base and “wisely” deploy the large amount of cash currently on its balance sheet, says Dietz.
“People talk about whether Facebook will be the next Google – I suggest people get behind Google and hope it becomes the next Facebook at least in terms of valuation,” he concluded.