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Facebook: The Good News

Facebook is a company with potential.  If its management team can figure out how to produce substantive, sustainable revenue from its large user base, it has enormous potential.  If they can’t, then its potential is moderated considerably.

People frequently pay too much for potential, whether in sports or business.

In addition to the challenges outlined in my previous post, there is now another:  Many of the company’s largely very young, senior management are now millionaires.  We see a similar situation frequently in sports…an athlete is approaching the end of an existing contract and plays out of his or her mind in anticipation of a new and larger deal.  After signing that deal, performance dissipates over time.  It will be interesting to see if Facebook executives continue to be motivated by greatness now that so much money has been made (at least on paper).

Consider this:  Apple is poised to earn somewhere around $40 billion of actual, spendable, net-profit in 2012.  Facebook is poised to earn no profits in 2012, and generate in the neighborhood of $5 billion in revenue.  The IPO price of Facebook suggests the entire company is worth $100 billion.  The current market price of Apple suggests the entire company is worth $525 billion.  Apple has eight (8) times more profit than Facebook has revenue, yet the market says Apple is worth only about five (5) times more Facebook.  Apple results can be spent.  Facebook spends more than what it takes in.

What we have seen of Facebook stock trading over the first two days of its existence as a public company is a comparatively far more realistic assessment of what the company is worth, than other similarly hyped IPOs.  This is excellent news for the company itself and for the broader markets as well.

In 1999, companies coming public saw their stocks trade up on the first day and subsequent weeks of trading.  Very few of those companies still exist.  The more realistic Facebook price and the skepticism surrounding it is very good for all concerned, because the price more accurately reflects the value the company currently represents (even though it’s still high as we saw in the Apple example above).

This moderation in prices (and expectations) is a reduction of risk for investors.  The risk is still too high; but, at least it’s moving in the right direction.

Read the original blog entry...

More Stories By Dana Barfield

Dana is the president of The Barfield Group, which has provided industry leading Financial Advice, Investment Services, and helped people Plan for Retirement for more than 20 years. He is a frequent speaker and writer for a variety of industry, regional, and national publications on business ownership and wealth building related topics.

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