From: James Cramer
To: Nicole Urken
Sent: Thursday, February 02, 2012 9:09 PM
I want to keep Facebook front and center. This is the real deal
From: Nicole Urken
To: James Cramer
Sent: Thursday, February 02, 2012 10:02 PM
Subject: Re: FB
Copy. We will hold our retail piece for next week (& look for pull-back there)
With Wednesday’s filing of Facebook’s IPO prospectus (form S-1), Wall Street couldn’t have moved more briskly than it did to attempt to tailor the social media behemoth to traditional financial metrics—aiming to measure revenue growth, profitability, valuation multiples, and beyond.
And, no doubt, there are certainly many compelling reasons to parcel the statistics into a digestible format—after all, the figures are staggering: 845 million monthly active users, 483 daily active users, 2.7 billion likes & comments per day, 250 million photos uploaded per day, 100 billion friendships. Plus, understanding the future growth and profitability (read: “monetization-of-users”) potential is key to understanding the future trajectory of the stock.
But right now the only metric that matters is: “Willing-buyer-meeting-seller.” And there are throngs of willing buyers.
Why? Because Facebook is a game changer. 845 million active users up from just 197 million three years ago in March 2009—not to mention from just a couple of thousand Harvard students when I joined “TheFacebook” at the end of my freshman year at Harvard (in 2004)—puts the company in a league of its own. The value proposition of the company allows it to capture the animal spirits of the market (sentiment-based investing). In other words, the stock debut will trade on its CONCEPT and its very staggering potential… not its valuation. Mark Zuckerberg’s mission statement in his letter to investors—“to make the world more open and connected”—is, in fact, more a driver of valuation at the out-set than calculating earnings per share growth.
Look no further than the action this week in “pin-action” names like Groupon, Zynga here in the U.S. or SINA —with its micro-blog Weibo—in China. We are seeing a “valuation revolution” based on prospects of potential growth—many of which remain to be proven. In other words, the new valuation metrics are about concepts. In fact, the initial trading action of the IPO will likely follow the sentiments of Zuckerberg himself in a 2004 interview with The Crimson: “I don’t really like putting a price-tag on the stuff I do. That’s just like not the point.”
Of course, ultimately there will be a time and place to look at valuation—and we have seen many high-flying social media IPOs come down to earth in the after-market. But we cannot forget the initial pops we have seen from Facebook’s lesser-brethren … Something bound to repeat.
As we have talked about on Mad Money, we have seen a number of “sliver deals” in the social media space, where only a small percentage of shares are offered in the filing, causing the stocks of the underlying securities to pop upon pricing: LinkedIn jumped up 109 percent in its market debut in May, Home Away was up 49 percent its first trading day in June, Zillow up 79 percent day one in July, and Groupon up 31 percent in its first day of trading in November.
And foreign social media IPOs were also met with much hype, despite cases of questionable financials. Dangdang—labeled the “Amazon of China”—was up 87 percent in its first day of trading in December 2010, Youku —the “Youtube of China”—was up 161 percent on its first day of trading in December, and even Renren—the “Facebook of China”—gave investors a solid 29 percent first-day pop in May despite worries about financials that arose just before the pricing.
Facebook—now synonymous with innovation, growth and a new age of connectedness—is primed for a healthy market debut. While there is a time and place for valuation, the truth is that, leading up to the IPO, it simply doesn’t matter. In the meantime, as analysts wrap their heads around the profitability metrics, watch the animal spirits reign supreme.