Monday, May 21, 2012

A Slap in the Facebook

Friday, the long-awaited Facebook IPO was launched, to vast media hoopla. I had the opportunity to comment on the deal, and I wondered aloud how FB, with $1B of profit, could sustain a $104B market capitalization. Facebook is nice, and my kids use it, but I figure it needs to grow at about 41% a year for many years just to be worth its current price.  104 times earnings (PE) is a little crazy.

By comparison, a company I like, Apple (I'm writing the blog on my iPad), has a 13 times earning multiplier. Apple has an interesting business plan: make revolutionary devices for people that they hadn't  thought of, and make them an iconic device.  In doing so, AAPL has become huge, and maybe could be a trillion dollar company.  At the same time, Apple sells at a 13 PE.  Apple also has a huge hoard of cash: $97 B. That means that Apple could buy Facebook, for cash.

I'm comparing the promise of the future (Facebook) with the promise of improvement.  It’s wild to me that a 104b IPO can go off at a relative price about seven times higher than the benchmark of new technology; especially when no product is involved. I must misperceive the value of Internet advertising, even though we occasionally use it.

That being said, I doubt Apple will buy Facebook. There are other, less expensive targets. They could buy the Corrections Company of America, the largest private prison company, and create the iCon. Or maybe buy the University of Phoenix, the nation's largest private for-profit college, and have a degree called iKnow.  Or, they may look back and see that they should have bought Facebook and named it iWish. But I think not.  I'm more prone to think in five years Apple will be the iconic computer of this generation and Facebook will have the revenue struggles of any company, and Apple can say iOne.