It’s still Zuckerberg’s company. CEO Mark Zuckerberg has shown remarkable tenacity in retaining control as FB has grown, and it’s questionable to what degree he will a) be answerable to shareholders in the traditional public company way, or b) work to appease shareholders and meet their demands. If investors begin clamoring for higher growth rates or more innovative ways to pull revenue out of FB’s user base in ways that veer from Zuckerberg’s vision, which direction would he go?
The answer is likely found within FB’s eight-year history to this point. Of course, having a maverick at the helm who bucks tradition is a double-edged sword. A management team that runs a company with its own agenda and shows less regard to investors’ concerns than usual can be a blessing or a curse. It may result in unique innovation and stellar blowout quarters, or it may result in eventual shareholder lawsuits. Sometimes it ends up with both.
But however you cut it, an investment in FB is, to a large extent, a wager on Zuckerberg’s talents, his vision, and, perhaps most important, his priorities.
Is Facebook a service company first, a money-making enterprise second? Speaking of Zuck’s priorities … what if we’re seeing a new breed of technology-based companies in which money isn’t the bottom line? Many beloved sites form part of the backbone of our online lives, sites we’d never want to see go away. But we wouldn’t want to invest in them, either: Wikipedia, Craigslist, your favorite blogging sites.
Wall Street is driven on the expectation that companies seek to maximize profit. Virtually every metric we have for evaluating a stock’s worth has this assumption built into it in one way or another. Either FB will eventually find its way into this profits-first mold, while not disrupting the essence of Facebook’s ecosystem, or it will be one of the largest public companies to challenge Wall Street dogma — and will probably quickly learn that Wall Street isn’t the place for it.
FB’s IPO size implicitly changes the rules of the game. It was the fourth-largest market cap offering in U.S. history and second-largest in amount of money raised. Note the other IPOs that were similar in size. Visa (NYSE:V) (in March 2008) processed nearly $2 trillion in credit and debit purchases in 2010 and has over 650 million cards in circulation — in the U.S. alone. GM (NYSE:GM) (in November 2010) is the world’s largest auto maker by number of vehicles sold in 2011. You would be hard pressed to find two companies that leave less doubt as to how they make money.
Hence, the significant uncertainty about how FB will monetize its user base, currently at one-seventh of the entire global population, means the expectations of the FB experience might have to change in the near future.
Does FB have true peers? Other tech giants that have shown as much innovation or more than Facebook are currently trading at not just cheaper multiples, but dirt-cheap multiples. Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) are less expensive on a valuation basis than many nontech companies with lower growth rates. For FB to justify its multiples and meet its implied future growth rates, it has its work cut out for it.
GOOG currently sports a price-sales ratio of 4.9, while AAPL’s is 3.5. FB has a P/S of 25.9. Forward P/Es are similarly divergent: GOOG and AAPL show 12.1 and 10.4, respectively. FB exhibits 56.7.
If GOOG and AAPL, with their robust growth rates and established markets, are guidelines for the Street’s eventual valuation expectations for FB, the stock has some rough sledding ahead of it. After all, a dollar earned from FB isn’t any more special than a dollar earned from AAPL.