The Facebook Money Bubble

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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@BillGates Debuting at $40/share if it trades at $400/share on $1 billion in net income, Facebook could be a trillion dollar company. Justified?
@c_tamirisa, a sustainability entrepreneur (Me) via Twitter to Bill Gates, Co-Founder of Microsoft Corporation and a global development philanthropist

The price to earnings ratio (PE Ratio) is the measure of the share price relative to the annual net income earned by the firm per share. PE ratio shows current investor demand for a company share. A high PE ratio generally indicates increased demand because investors anticipate earnings growth in the future.
Meaning of P/E, Look up stock ticker and P/E for Apple Corporation, “AAPL P/E”, on Google

Networking online on a saturday morning, I ran into a Tweet on my Linkedin account from a prospective investor I am courting for my corporation, Preetish Nijhawan of Cervin Ventures, about some Facebook facts which triggered a few thoughts in my mind.

Facebook, the Harvard dorm startup with contentious ownership of a sophomoric idea to gawk at pictures of pretty girls roaming the Yard, has Silicon Valley agog over the prospect of the baby faced Mark Zuckerberg, the CEO of Facebook, becoming the first trillion dollar geek once his baby goes public according to a recent SEC filing (coincidentally on the same day, February 01, I wrote my internal memo to the Federal Reserve in 2003 used in my guinea-pigging, a crime being committed by the United States government. I am being told I am an Obama proxy, put under existential pressure to comply with the government guinea-pigging and curiously, I am unemployed, exhausted of unemployment insurance and without legal counsel, because the Fed pushed me out after I blew the whistle. Government guinea-pigging has been compromising my entrepreneurship and livelihood and has destroyed by life.).

The site, which I use both for my own corporations and for a personal page to network with friends and family, boasts nearly a billion pages of individuals networking around the world, earned $3.5 billion in 2011 with a net income of $1 billion on 2.35 billion total privately owned shares selling personal ads to many around the world at a low price for occupying the cyber real estate.

Facebook’s business model is unoriginal. Google began its ascent in the Valley similarly by selling advertisements before facing the imperative of diversifying into Android, energy and other hard high-tech investments too keep investors interested. It now trades close to $600/share at a market cap of about $200 billion and total assets of about $75 billion, expected revenues being about $7 billion in 2011 for a search engine and licensing Android mobile operating system, an Apple competitor. Facebook wants to beat Google’s market valuation by 5 times and Apple’s by 2: it wants to be the trillion dollar corporation but with little to show in anticipated earnings.

The Wall Street underwriter Goldman Sachs whose efforts to fund Facebook with $25 billion privately were quashed is expected to price Facebook between $40 and $45/share for its initial public offering (IPO), valuing the social media company at about $100 billion. The 2.35 billion shares, some for a selected group of higher weighted voters on the Facebook Board and others for the public, are all currently privately owned with an earnings per share (EPS) of 46 to 43 cents (based on the type of EPS. These shares, valued at about $1.50 per share, are being taken public at an expected IPO price of $40-45/share, more than 20 times Facebook’s current liability, with options for all the current private share holders to convert their holdings into cash (return on investment) by selling a portion of them. Zuckerberg is reported to net about $1.6 billion by exercising his options upon IPO later this year. He is currently worth about $25 billion, one-half of the value of the Gates Foundation or a quarter of Gates and Buffett put together.

Facebook’s market capitalization would be about $1 trillion if the stock, with the ticker “FB”, trades after IPO at $400/share, at 10 times the IPO price, just as Google had skyrocketed after the IPO.

The P/E at an expected IPO price of $40/share and diluted pro forma EPS of 43 cents is a staggering 93 notwithstanding Facebook’s status quo revenue projections, a market bubble in the making for a Fed used to pleading ignorance about the difficulty of recognizing bubbles, a bad habit which got the country into the current mess. The third strike, after the Clinton tech bubble and corporate governance scandals and the 2007 housing crisis, especially with the Dodd-Frank financial regulatory reform law yet to be implemented, will be an out, back to the bullpen for the United States of America.

Memories are short on Wall Street when there is too much money sloshing around trying to find a place to park at near-zero per cent federal funds rate from the Federal Reserve through 2014 even as unemployment is at an all-time high of 8.3 per cent and Ben Bernanke, the Chairman of the nation’s central bank, is nonchalant about the gradual pace of economic recovery to full employment between 2016 and 2022.

Time Magazine sees political corruption in the Facebook IPO, a consequence of the need for bi-partisan campaign fundraising in billion dollar elections since 2008. The missing link seems to be the $25 billion lawsuit by AIG against the US government involving the Fed/Treasury bailout of Goldman Sachs losses in the housing crisis. As coincidence may have it, those $25 billion appear to be the monies Goldman wanted to invest privately in Facebook from offshore investors but closed to US investors.

The IPO, besides returning handsome rewards for the company’s private investors, grossly misallocates capital in little more than facades of Silicon Valley corporations to turn them into quasi-monopolies for investment dollars for the next big wave of growth by picking winners early on to merge and acquire corporations in other industries in the economy. As examples, Google’s attempted but weak foray into the energy sector and of Better Place’s Shai Agassi raising $700M after his attendance as a Global Leadership Fellow at Davos with little to show in returns for his investors. Solyndra is no exception.

Mark Zuckerberg’s company, absent solid revenue projections, is worth 2012 gross revenues before its goes IPO: about $5 billion or only slightly more than $2/share. He is better off thinking about how to match investor expectations sooner than later if Facebook is not to become another MySpace, by shorting perhaps himself by proxy into oblivion soon after going public – a potential securities and exchange fraud.

Facebook ought to begin at $5 billion market capitalization at $2/share ($1 billion in net income on $3.5 billion in gross revenues), grow solidly the old fashioned way to $100 billion at $40/share ($20 billion in net income on $65 billion in gross revenues) and if it can survive, become a trillion dollar company at $400/share ($200 billion in net income on $650 billion in gross revenues).

To transition their poorly performing companies into the Web 2.0 space and the emerging Web 3.0 space, we advice the major conventional media/publishing houses such as Time-Warner, The Washington Post Co., New York Times Company and Rupert Murdoch’s Wall Street Journal to acquire Linkedin, Facebook and Twitter, lest the ill-thought through and ill-underwritten IPOs such as Facebook bring about the next big collapse or poorly-matched mergers such as AOL-Time Warner. The Securities and Exchange Commission (SEC) must halt the Facebook IPO and the Congress must look closely into amending SEC rules to prevent companies with a brand but weak revenue projections from using the IPO vehicle to pay back investors.

The key point to note is that Goldman’s controversial private foreign investment of $25B which was earlier not open to US investors can now be made after the IPO under the facade of US opening (in my response in a Linkedin discussion I started on the topic).

By the way, I am valued at $500M with solid revenue projections of $7B by 2022 by creating real jobs for real people, including social media which must be transformed into a globally competitive marketplace. (In response to Mr. Zukang of UN Rio+20 on Twitter) Intertemporal market valuations of inter-networking and its myriad applications must correlate well to outcomes for a sustainable future. Any investors?


About Chandrashekar (Chandra) Tamirisa
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2 Responses to The Facebook Money Bubble

  1. Response to Andrew Brown on Linkedin discussing my above article:

    What is $100B in shareholder capitalization of what is currently worth $3.5B in annual revenues, $1B in net income and about $2 for each of the 2.35B shares on average going to buy the US economy? What products? What services? How many jobs toward these purposes?

    It may be that Facebook’s perceived value is $100B for 2.35B shares currently being privately held and no new shares to be issued or $40 per share. That perception in numbers is a P/E of 93 for Goldman Sachs and those who support Zuckerberg.

    That stock is not widely available except at at least $40, returning 20 times current investment for its shareholders without any extra features on Facebook.

    Now let us assume, the stock is more widely available, realizing the P/E, based on the perception the marketing of Facebook and Zuckerberg creates, the price will be raised to $400, creating a wealth effect. People may buy other things and increase US consumption as Clinton did in the ’90s, thereby growing the US economy at the same rate of growth as predicted.

    For the above scenario to become practical, on average every tax paying American household must buy 16,000 shares of Facebook assuming that all of it is held by the public.

    If the SEC S-1 is reviewed, about 40% of FB can be held by the public once Zuckerberg’s private investors are paid off. At some point, we do not know when yet, about 6000 shares could be held by each of the 145M tax paying American households or abroad. What is the growth path for the US economy based on these numbers? More importantly, averages do not work here. If 14.5M tax paying US households can get their hands on FB shares, Americans would be lucky.

  2. 40m CSPAN ‏@cspan
    .@Facebook Founder & CEO Mark Zuckerburg interviewed by @TechCrunch founder Michael @Arrington – NOW on C-SPAN
    Expand Reply Retweet Favorited

    17s 1776 @1_776
    @cspan @facebook @TechCrunch @arrington $4 is the true value of @facebook if it survives charges of political collusion
    Hide conversation Reply Delete Favorite
    8:41 PM – 15 Sep 12 · Details

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